China Cuts Interest Rates to Lower Corporate Borrowing Costs

The daily said that market capitalisation fell by Rs. “This is the biggest one-day slump in China since 2007”.

By now, dear reader, you may have read at many places that this was the biggest fall of the Sensex ever.

“The stock market traditionally has volatility“, he said. They stood back and watched while the stock market ran up, then had a ham-fisted response when it fell, that created the need for a correction but made it more hard to react… The Nasdaq Composite Index sank 179.79 points, or 3.82 percent, to 4,526.

Investors look at screens showing stock market movements at a securities company in Beijing.

But this is only partly true. “It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound”. Why has the contagion taken so long to spread? The simple answer is-currency wars. Until 11 August 2015, one dollar was worth 6.2 yuan.

The People’s Bank of China (PBOC) is planning to increase lending by injecting the banking system with liquidity in an effort to boost the economy. This has essentially been done to help Chinese exporters. In this sense, the recent rounds of the yuan’s devaluation might be considered to be in line with market principles. In the five years prior to the devaluation, the yuan surged an inflation-adjusted 33 percent against major trading partners.

The Chinese authorities have intervened numerous times to try and arrest the share sell-off – the latest measure allowing the state pension fund to invest up to 30% of its assets in Chinese stocks. That has added to the uncertainty and anxiety in financial markets around the world. The simple answer lies in the fact that a shrinking factory sector is a reflection of weak Chinese exports.

Some analysts welcomed the moves as overdue support for the world’s second-largest economy, but warned it may not be enough to shield China from a slowdown that many suspect is much sharper than official figures suggest.

And as growth in all three regions declines this can be expected to put downward pressure on growth in core countries, especially Japan and Germany, both of whom also rely on an export-led growth strategy. Other possible risks to growth are that the turmoil in financial markets dents business confidence here, potentially slowing investment, or that Asian investors flee the London real-estate market.

The editorial noted that it is complicated to evaluate China’s economy. We should become inured to face all sorts of problems with grace. And that can’t be good for the economy. But what’s happening in China and why is it having such an impact on western markets? The BSE Sensex had gone up marginally on Friday. The fear is that China will devalue the yuan further.

When it comes to China it’s particularly the industrial commodities like metals, coal and oil. The Chinese economy grew at the slightly lower rate of 7 percent in the first half. And that is a possibility that the stock market needs to adjust to.