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  • Contagion effect of China on World Markets

    Publish Date: 17th August, 2018

    A slowdown in the Chinese economy is a big problem for the rest of the world. On 15 Aug 2018, when the Indian markets were closed, the Chinese Yuan weakened against the US dollars. It hit a fresh low of 6.95 yuan per USD. Muted growth in earnings by Chinese companies, especially the investment conglomerate Tencent, set off a downward wave across the global markets. Tencent stumbled, missing earnings targets and posting a drop in profit growth for the first time in more than a decade. Due to this, the Chinese equity markets plunged by nearly 2 per cent. US equities too declined by nearly 1 per cent. On the same day, even a marked recovery by Turkish Lira, almost 18 per cent, was overshadowed by the Chinese concerns.

    Click here to read more about China’s falling Yuan

    Why does the contagion effect occur?

    China is the biggest market for goods or commodities produced by many countries in the world. Thus, the prices of commodities get dragged down due to weaker economic growth when the Chinese are buying fewer good or commodities. On August 15, when the Chinese markets were stumbling, copper was down nearly 4 per cent, crude oil was also down by 3.2 per cent. This slowdown in commodity prices directly affected the countries who export to China. Share prices in many countries tumbled as a result.

    Hopes for a breakthrough in US-China trade relations have brightened the moods of the market today on Aug 16, 2016. The news about the Chinese Vice Commerce Minister will travel to Washington to meet a high-level delegation for talks in late August has freshened up investor sentiments.

    Click here to read more about US-China trade face-off

    How does all this affect Indian markets

    Amidst this Turkish currency crisis and economic slowdown in China, the Indian Rupee traded around the record low of over Rs 70 to the US dollar. A lot of experts like former RBI governor Raghuram Rajan have dismissed concerns about the rupee impact as a result of this contagion. No wonder then, foreigners are net buyers in August 2018 so far in both equity and debt markets. Indian stock markets are vulnerable to external market fluctuations because of the long history of high current account deficits and the outflow of foreign funds. However, lately, domestic flows have intensified into equity markets. Despite overall foreign flow outflows as a result of the panic spreading across emerging markets, over a $1bn is invested every month by mutual funds through systematic investment plan. This has kept Indian share prices relatively calm.

    Click here to read more about India’s correlation with the Global Markets

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