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The Great Fall of China


The weekend gone by was nothing ordinary for the financial universe. In fact, it is not Monday’s market carnage, but a few developments during late last week, that have set the course for the unprecedented turmoil across the global markets. Friday’s selloff was triggered by China’s Caixin PMI data for the August which fell to 47.1 from July’s 47.8, showing contraction in manufacturing activity. The world had hoped for aggressive action on the part of China’s central bank PBOC to arrest the market fall after Dow Jones hit its lowest level since 2011 on Friday to end 530 points down. China’s Shanghai Composite, Japan’s Nikkei and European markets also cracked over 3 per cent the same day.

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The investor community justifiably expected monetary easing from the PBOC, not only to stem the market slide but also to revive shrieking manufacturing juggernaut. But, no relief could be felt over the weekend. On top of it, China surprised the globe on Sunday, by allowing its gigantic pension fund, the world’s largest, to be invested in its volatile stock market. China’s pension fund, accounts for roughly 90 per cent of the country’s total social security fund pool. It had net assets of 3.5 trillion yuan ($547 billion) in 2014.

Global investors did not perceive this to be prudent for a country that barely a few weeks ago saw stock markets wiping out about $4 trillion capital. The move to permit pension funds entering stock markets, coupled with last week’s knee jerk devaluation of yuan is rightly being interpreted as a sign that China is losing the plot over crisis management.

Investors feel China is making a massive mess-up with its markets that may push global markets to the brink. The Monday’s mayhem in global markets was not triggered by any sudden development overnight but by fear of emerging markets-led global contagion. Global investors are particularly jittery on cross border exposures.

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A Bloomberg report suggests that Global banks (UK, Spain and Greek in particular) are heavily exposed to emerging markets and suffered significant currency depreciation over the past month. As of March, their exposure stood at more than $4 trillion, according to the Bank for International Settlements.

The fears came true on Monday with Nasdaq futures halting temporarily after hitting a circuit breaker followed by unprecedented rout in Chinese, Indian and European markets.

The emerging-market rout seeping into the commodity space breeds another major worry at the macro front. The Bloomberg Commodity Index of 22 raw materials sank to its lowest level since August 1999 as Brent crude fell below $45 for the first time since 2009. The unprecedented tanking of commodities may take its toll from the feeble green shoots of global recovery.

The world is looking up to China’s central bank with hope that it will provide monetary rescue to its sagging economy and sinking markets. PBOC has never used its monetary arsenal to prevent credit growth going out of control. Will People’s Bank of China use its fire-power of $4 trillion deposits to kick start a monetary easing now? If experts are to be believed, China’s monetary easing now should be a no-brainer. But Chinese surprises are always worth all the tea in China. Therefore, until the easing comes, both bulls and bears will have sleepless nights, although for different reasons.

(Article first published in dailyo.in)

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