Published on Sunday, August 30, 2015
Chinese Crisis: 3 Questions for NRI’s
M.R. Raghu
Latest News

Sensex fell by 1,624 points (5.94%) on August 24, 2015 to reach 25,741 in what is now termed as Black Monday. That was unprecedented given the normal movement of say 100 to 200 points in a day. Though Sensex subsequently recovered to 26,392, the unease continues amongst many of us. So, what has caused this sudden panic and how should we (NRI’s) prepare ourselves. The following questions may be appropriate to answer.

1. What is this crisis?

The Chinese stock market has been on a roll since November, 2014. The Shanghai index increased from 1,924 to 4,098, representing a gain of 113%, within a matter of 8 months. This was due to easy money available through banks which lured retail investors into the market. Everyone from fishermen to laundry cleaners were busy making money in the stock market. However, as we all know, such a sudden increase in the market through mindless buying can only go on for some time and not for ever. Companies have become extremely over valued and smart investors started exiting the market. This created a panic among retail investors and they were rushing out of the market creating further slide. The government tried to intervene and prop up the market but it failed. The Chinese stock market fell 35% within a span of 2.5 months. On August 24 (Black Monday), the Chinese market fell by a whopping 8.96% and immediately on the next day all global markets fell including India.

But the question is why a Chinese stock market collapse should cause such a global panic. This is because there is a larger worry among global players than the Chinese stock market. That of Chinese economy.

Since 2008 when the last financial crisis hit the world, there have been fears about slowing global growth. While USA has been trying to recover, Europe is in shambles with only Asia left to support. China is not only a significant part of Asia but also the world. It contributes heavily to the global growth in terms of trade (exports and imports). Before 2008, Chinese economy was growing at the rate of over 10%. Today, the growth has slowed down to 6-7% with fears that it will be even lower. When economic growth is low, countries will find it difficult to create employment which will lead to social unrest. It will also find it difficult to attract foreign money which will hamper investments. Business confidence will fall and businessmen will not make any new investments. Hence, it is important for any country to enable economic growth.

China was predominantly depending on exports for its growth. After 2008 financial crisis, the overall growth of trade (exports and imports) reduced thereby reducing China’s growth. Hence, this panic all over the world. In short, today when China sneezes, the world catches a cold!

2. How is India affected by this?

The impact on India is more symbolic than real. Many emerging markets (Indonesia, Brazil, and Russia) are highly dependent on China as commodity exporters. China is one of the largest consumers of many commodities to run its global factory. When China signaled a slowdown in growth, many emerging markets (dependent on china) started feeling the heat and this heat has spread to all other markets including India. Even countries like Germany and Australia (not part of emerging markets but part of developed markets) fell as they have strong links and dependence on China.

India’s economic link with China is very limited. India is not a commodity exporter (like Russia). The only risk India faces is that it can be swamped by cheap imports from China that can threaten local companies. With Yuan devaluation, this threat is real.

The main impact on India will be through its currency. As a fallout to Chinese crisis, many emerging market currencies hit their lows during 2015. (Brazilian Real -26%, Turkish Lira -20%, South African Rand -13%). India is among the least affected currency where the INR fell only by 4% so far in 2015 against the USD. If the Chinese crisis deepens, it will further impact emerging market currencies and we can expect India also to feel the heat in terms of further depreciation of INR.

On the positive side, continuous strain on China can open doors for India as one of the fastest growing economies in the world with least linkages to external world. With America not showing any great signs of economic rebounding and Europe in a limbo state, only very few destinations for investments in the world are left and India can definitely count as one.

3. What should NRI’s do?

In this Chinese crisis, NRI’s experienced both good news and bad news. The good news came in the form of lower currency. For eg., the Kuwait Dinar spiked to Rs.224/KD and seem to be hovering around Rs.217/KD now. NRI’s that remit money regularly back to India will certainly be smiling and would hope for even more depreciation of the Rupee!

On the other hand, the steep fall in Sensex/Nifty caused their stock portfolio values to plummet and they were left worried on what the future course of Sensex could be.

For NRI’s, the following observations can be helpful:

a. The current Chinese crisis is not just a China issue but a global issue that can affect all markets including India.
b. If China slows down (as is feared), it will result in global slowdown, and may negatively affect stock markets and currencies.
c. However, India’s fundamental strength (Strong economic growth, ample forex reserves, less linkages to outside world, new government that is reform minded, and a prudent RBI) will make it as one of the safest destinations for investments for foreign investors
d. The long-term story of India remains solid
e. NRI’s should benefit from the depreciating rupee by regularly remitting money back home and invest in various avenues.
f. Diversify your investments by spreading your savings among risk-free fixed deposits/bond funds, and volatile equity funds with some exposure to gold (as insurance).

The RBI governor is likely to decrease interest rates in response to lower inflation and hence presently FD rates are looking attractive. Also, when interest rates come down, bond funds will do well. In equities, for those that do not have time to follow markets on a daily basis, invest regularly in well performing diversified mutual funds. If you have the time to select sectors/stocks, favor healthcare, auto, FMCG, infotech and banks. Avoid Realty, metal, power, PSU’s and small cap.

One final note of caution to NRI’s in the Gulf. GCC has more linkage to West than to East. Oil prices have fallen from a high of $140/barrel some years before to $40/b now and are expected to remain at this level for some time. Hence, government spending on projects will likely come down which will put pressure on many companies. Hence, restructuring, cost cutting and job retrenchment can be expected. Job security for NRI’s can come only through increased training and further qualifying. Job security should not be based on the hope that oil price will rebound.
Mr. M. R. Raghu,CFA, FRM is the Head of the Research Unit and Senior Vice President at Kuwait Financial Centre MARKAZ.
View Profile
Express your comment on this article
      characters remaining   Human Verification Code Type the Numbers you see in the picture below.


Label
Disclaimer: The views expressed here are strictly personal and IndiansinKuwait.com does not hold any responsibility on them. We shall endeavour to upload/publish as many of the comments that are submitted as possible within a reasonable span of time, but we do not guarantee that all comments that are submitted will be uploaded/published. Messages that harass, abuse or threaten other members; have obscene, unlawful, defamatory, libellous, hateful, or otherwise objectionable content; or have spam, commercial or advertising content or links are liable to be removed by the editors. We also reserve the right to edit the comments that do get published. Please do not post any private information unless you want it to be available publicly.
Image

Open letter to class XII students Some tips on how to live a successful life By Dr. Anis Ahmad

My Dear Students, You are at the threshold of a new beginning. You are going to be an adult. S ...
Image

Chatting with Chaitali

Chaitali B Roy is the author of ‘Women of Kuwait : Turning Tides’ (Har- Anand Publications) . She i ...
Image

Good film is a truthful representation of its time, says veteran actor Naseeruddin Shah

The state of Bollywood films is the same where it was started, said Veteran actor Naseeruddin Shah ...
Image

Childnology

Another year has come and gone, but in the tech world, it means lot more major innovations are on t ...
Image

Budget 2017: Achche Din- Still Elusive?

This year, the government is changing the British-era legacy by presenting budget on February 1, in ...
Image

Antiques, Curios and Much More...

Have you ever heard about a museum at home in Kuwait? We, the IIK team were fortunate enough to vis ...
Image

Safe, Orderly and Regular Migration

"Safe orderly, regular and responsible migration” the notion of migration governance has received a ...
Image

Happy New Year –Think Different Be Different

Happy new year----This is the phrase we say every year does it change our life? Think different ...
Image

Reflections on Changing Times

Malini Viswanath in Conversation with Anju Dheman(The quintessential academic) and Chaitali Roy(The ...
Image

Black In-tensions

One decision of our government was announced one fine evening. PM Narendra Modi sent shockwaves thr ...
123
Image
Experience Indian Corner Tandoori Nights at Al Manshar Rotana Hotel
Al Manshar Rotana Hotel at Fahaheel, Kuwait launched an authentic Tandoori Night with an Indian cor...

Image
Biryani & Kebabi restaurant opened at Arabia Mall in Egila
Biryani & Kebabi is the newest addition to Al Sabah & Kohli food and beverage brands. Al Sabah & Ko...

Image
Indulge in the luxury of Indian dinner every Tuesday at Jumeirah’s Garden Café
We all love luxury. We have many occasions to celebrate life luxuriously. Be it our anniversary, bi...

Image
A delightful treat to our taste buds- Samrat Restaurant Weekend Buffet.
Delicious Food.. Good Company with Family or friends ... That’s what all look for on a weekend. B...

Image
Enjoy the Luxury of Healthy Breakfast
Who doesn’t like to sip a hot chocolate or hot coffee with yummy and healthy English breakfast in a...

Image

Teams Division League Season Week 03 RESULTS

After a great kick-off to TDL Season 01 and games going on as usual, week 3 of TDL witnessed some v ...
Image

KITCA-Cricket Tournment-week 01

Teams Division League – Season 01 kicked-off in great style on Jan 27th 2017. This league is one of ...
Image

Level 0 Cricket Coaching Course for Beginners

Kuwait Cricket Coaches Panel is conducting a Level 0 Cricket Coaching Course targeted at beginner c ...
Image

TRASSK Football Tournament

Thrissur Association of Kuwait (TRASSK) organized a football tournament for members at Mishref Foot ...
Image

Students India Football Tournament - SWAT Champions

S.W.A.T Abbasiya emerged the champions in the second Football tournament conducted by Students Indi ...
Feb
23
Feb
24
Feb
24
Feb
24
Feb
24
Feb
25
Feb
25
Feb
25
Feb
26
Mar
2
Mar
3
Mar
3
Mar
10
Mar
11
Apr
21