Monday Market Massacre -effect of the chinese slump

On Monday equity markets allover the world went on a downward spree. This avalanche in the markets was triggered by over 9% rout in the Chinese markets. Chinese markets plummeted owing to the fears of the economic slowdown despite the devaluation of Renminbi. The devaluation of Yuan, officially the Renminbi, led to speculation that the economy is slowing, and this slowdown has led to the devaluation of Yuan to contain this slowdown by increasing exports.But, it seems as though China is on a unmanageable slow down trajectory.And similar fears among the investors has led to an increase in the volatility of the markets.

Tremors of the global equities sell-off were felt in the currency markets, bullion markets, and energy markets.The Rupee hit 66.60 against the US dollar on Monday. The rupee, however, gained 54 paisa to close at 65.87 on Tuesday, as the Chinese central bank cut the interest rates by 0.25 percentage points and the reserve requirement ratio by 0.50 percentage points.Gold prices increased with the rise in fear over the volatility in the global markets while the oil prices continue to be decreasing amidst supply glut.

As far as India is concerned, both the Sensex and Nifty took a beating on Monday but have regained some of their losses in trading on Tuesday.Indian economy though vulnerable to the global changes, especially those in China, is comparatively more robust than other economies due to a variety of factors.First,inflation rate is under control and moderate; second,current account deficit(CAD) is low; third,fiscal deficit is manageable; fourth,growth is still good compared to other major economies; and with positive investor sentiments over increase in the infrastructure spending and most probably the passage of bills like GST.An expected untimely rate cut by RBI is also a major factor which is keeping the market sentiment in high spirits.

Experts have opined that the volatility in the markets will continue mainly due to decreasing manufacturing growth rate in China.The stocks continue to plummet wiping billions from Chinese equity market, amidst the efforts by the Chinese government to contain the losses ,showing that the government efforts have not had the desired effect. What remains to be seen is that will China be able to curtail this downward spiral?

The Chinese Slump.

The People's Republic of China, the world's second biggest economy is facing a major crisis today. With over 30% of the value being knocked off the Chinese market since the slump began in mid-June.

The crisis comes after the rallying of the Chinese markets as the:

1)county's central bank cut interest rates 3 times since November last year,

2)the rules regarding Margin trading were eased.

Margin trading has always been considered risky, but with the loosening of the reins, trading in stocks on borrowed money by mostly the retail investors of china increased.

 Unlike most other stock markets, where investors are mostly institutional investors, in China, 80% of investors are small retail investors.All the above factors led to volatility in the markets.with Greece in the backdrop,the volatility in China is of great concern owing to the huge size of the china's economy.

The concerns are justified as in the last three weeks about $3 trillion ,which is more than 10 times the GDP of Greece($237 billion in 2014) or 1.5 times the GDP of India($2 trillion) has been wiped out from the chinese markets.

With the shanghai composite losing about 34% in 3 weeks and the number of chinese firms who want to halt their trading in the Shanghai and the Shenzhen Exchange reaching to above 1200 out of the total 2800 enlisted firms, some are describing it as the busting of the chinese bubble.
 
Effect of the Chinese slump on the world economy:

1. Metal prices plunged with the crash in the Chinese markets and the strengthening of the US dollar.
2. Asian markets as well as the US markets have also shown a slowdown.
3. Commodities like gold, silver and platinum fell as a stronger US currency makes dollar dominate        commodities more expensive for holders of other currencies.
4. Crude oil prices along with coal, natural gas and iron ore price are trending lower.
5. Aviation sector shares benefited with the fall in crude oil prices as it accounts for 50% of their operating cost.

With the Eurozone members giving Athens until the end of this week to propose reform measures in order to secure the funding it needs to stay in the euro zone, and the market crash in China threatening a new blow to the country's already slowing economy, all we can do right now is observe and take notes.