- The Chinese stock market has fallen significantly over the past month, dropping 31.7% since July. The Chinese government has taken drastic measures to try and stop the falling stock prices. - While a falling stock market in China could negatively impact the global economy due to China's role as a major trading partner and consumer of commodities, the exposure of Chinese households to the stock market is relatively low. Most Chinese households' financial assets are held in cash and bank deposits rather than stocks. - The stock market crash reflects the fact that China's economic growth rate has been slowing in recent years after a long period of double-digit growth. The crash was likely exacerbated by the unsustainable rise in stock prices due to

1. How much should we worry about the
Chinese stock market collapse? A A A
- By Vivek Kaul
The Shanghai Stock Exchange
Composite Index has fallen by 31.7%
over course of the last one month. This
after rising by 150% between July 2014
and early June 2015. Yesterday (July 8,
2015) it fell by 5.90% to close at
3507.19 points.
The Chinese government is desperately trying to ensure
that the stock market does not fall any further.
Yesterday, it banned share sales by major shareholders
for a period of six months. This means that investors
who hold greater than 5% stake in a company will not be
able to sell any of their stake over the next six months.
"This is not something would happen in the U.S. or in
any other developed market...It does smell a little bit of
desperation," Brian Jacobsen of Wells Fargo Funds
Management told Bloomberg.
Other than this the government has already banned
short selling. Initial public offerings by companies are
also not being allowed, so that investors are interested
Vivek Kaul

2. in buying the shares already listed on the stock market.
Over and above all this around 1,300 of the 2,800 stocks
listed on the Shanghai Stock Exchange have
announced trading halts.
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This massive fall has got the world worried. After all
China is the second largest economy in the world. As a
news-report on CNN.com points out: "Since China is the
second largest trading partner for both Europe and the
United States, it goes without saying that a healthy
Chinese economy is good news for the developed
world."

3. Further, China is a big consumer of commodities. If the
Chinese economy slows down any further, its demand
for commodities will fall. Taking this possibility into
account, the West Texas Intermediary (WTI) oil price is
down by 10% over the last one month. Similarly, copper
prices have fallen by close to 7.5% during the same
period.
The point being if the Chinese economy slows down,
then the overall world economy will slow-down as well.
This logic seems pretty straightforward. But the real
story is a little more nuanced.
China was growing at double digit growth rates for a
long time. Data from the World Bank shows, that the
country grew by 10.6% in 2010. After 2010, the
economic growth in China has been slowing down. In
2011, the economic growth was at 9.5% and since then
it has fallen further. In 2014, the economic growth was at
7.4%.
The growth is expected to slip further this year, with the
International Monetary Fund (IMF) projecting that China
will grow by 6.8% in 2015. The economic growth
projected for 2016 is 6.3%.
Even though the economic growth has fallen

4. the Chinese stock market has gone from strength to
strength. This has basically happened because of an era
of easy money initiated by the Chinese government and
the People's Bank of China, the Chinese central bank, in
order to charge up economic growth.
The question is will the fall in the Chinese stock market
create further woes for the Chinese economy?
Conventional economic theory holds that a stock market
ultimately should be a reflection of the state of the
economy. But the state of the stock market also impacts
the state of the economy.
As George Soros writes The New Paradigm for
Financial Markets: "The crux of the theory of reflexivity is
not so obvious, it asserts that market prices can
influence the fundamentals. The illusion that markets
manage to be always right is caused by their ability to
affect the fundamentals that they are supposed to
reflect." Reflexivity refers to circular relationships
between cause and effect.
One impact that I can clearly see is on Chinese
companies which have high debt. A major reason
behind the government propping up the stock market
was to allow high-debt Chinese firms to have access to

5. another source of funds. With IPOs now being banned
that isn't going to happen.
The bigger question is how will the Chinese consumer
react to this fall? Will his consumption of goods and
services come down?
The Chinese exposure to the stock market is not very
high unlike the Western countries. As Wei Yao of
Societe Generale writes in a recent research report:
"According to China Household Finance Survey (CHRS)
conducted by the South-western University of Finance
and Economics, equity market investment represented
less than 10% of Chinese households' financial assets
in 2013, whereas cash accounted for 17% and bank
deposits accounted for nearly 55%. For reference,
households' bank deposits are equivalent to 80% of
GDP."
With the stock market rallying in the recent past before it
started to fall, the number of households investing in
equities has gone up. But Yao feels that the number still
remains lower than 15%. The number is 34% in the US.
Hence, not many Chinese households will be impacted
by the fall in the stock market.

6. Typically, the wealth effect comes into play in a situation
like this. With the overall consumer wealth coming down
with the fall in the stock market, the consumer
expenditure tends to come down as well.
Yao sees a limited possibility of that happening. "The
Shanghai composite index peaked above 6,000 in
October 2007 and subsequently lost half of its value by
May 2008 and two-thirds of its value by November 2008.
During the same period, real growth of retail sales first
remained largely stable at 12-13% year on year and
then picked up to 16-17% year on year thanks to
disinflation," writes Yao.
She further points out: "When the equity market started
to surge in March, we noticed that households were
holding back on buying big-ticket items, especially cars.
Passenger car sales growth fell precipitously from 9.4%
year on year in March to 1.2% year on year in May. If
the equity market were to crash, car sales might not pick
up but might not deteriorate further either."
The Economist also puts across a similar sort of view:
"The free-float value of Chinese markets-the amount
available for trading-is just about a third of GDP,
compared with more than 100% in developed

7. economies. Less than 15% of household financial
assets are invested in the stockmarket: which is why
soaring shares did little to boost consumption and
crashing prices will do little to hurt it."
What this tells us clearly is that we need to worry about
the Chinese stock market crash, at the same time, we
don't need to worry too much about it. The stock market
is basically catching up with the economy.
Bill Bonner is the President & Founder of Agora Inc, an
international publisher of financial and special interest
books and newsletters.
A Simple Explanation
for the Crash
 By Asad Dossani, Editor, Profit Hunter · 28 Aug 2015 · ARCHIVES
All over the financial press, there are various
attempts to explain why the markets have crashed.
Most of these stories are naturally focused on
the Chinese stock market, as this is where the
turmoil started.
Why did the Chinese stock market crash?
First, let's look at some numbers. So far this week, the market is
down 12%. Since the market peaked in June this year, it is down
40%. Looking at these two numbers, you'd naturally think that
Asad Dossani

8. something was very wrong. That, perhaps, the economy has
significantly turned downhill in the last two months.
Let's look at some more numbers. Over the last one year, the
Chinese stock market is up 39%. Yes, you read that correctly.
The market is up 39%, and that includes the 40% drop in the last
two months.
From June 2014 to June 2015, the Chinese stock market went on
an incredible bull run. From trough to peak, during the year, the
market went up 151%. That is huge. Unfortunately, this fact has
not been mentioned enough. But it's crucially important for
understanding the recent fall.
A simple fact of stock markets is that they experience bubbles
that eventually burst. Whenever the market goes up too much too
fast, it inevitably comes down again. And this is exactly what's
happened to the Chinese stock market.
Now I'm not making any claims as to why the market went up
151% in the first place. There could be all sorts of reasons, but
that's another discussion.But given how high the market went up,
the drops over the last two months are not surprising.
What is surprising is the speed at which it's fallen. And the
volatility has been incredible. But it goes to show you how fast a
bubble can burst. Especially when the market had gone up so
much to begin with. Note that just because there was a bubble, it
doesn't mean we can predict when it will burst.
Bubbles in financial markets are nothing new. And the recent
stock market fall in China is just a bubble bursting.
But let's not forget the market is still up 39% this year. That's an
excellent number for any stock market anywhere in the world.

9. Protect yourself from a
Market Crash
 By Asad Dossani, Editor, Profit Hunter · 26 Sep 2014 · ARCHIVES
-13%: The largest daily drop in the value of the
Nifty Index since 2007. This occurred on 24th
October 2008, right as the global financial crisis
took hold.
Markets crash. This has always been the case and
always will be. And while we know that the market will crash at
some point, we don't know when this will occur. Nor do we know
how large the crash will be. But we can still do something about
it.
We're going to talk about an options trading strategy called the
protective put. A protective put is used to insure ourselves against
market crashes. It is a trading strategy that makes money
when the markets crash, and loses money when the markets
go up.
Now imagine you own a stock portfolio. And suppose it's a long
term portfolio. That is, you intend to hold these stocks for the
long term, and you expect to make money doing so. But in the
short term, markets fluctuate. You can easily lose money in the
near future for all kinds of reasons.
For example, there could be another global crisis on the horizon.
Or we could have an economic slowdown.
Some of us may be happy to take these risks and ride out any
storm that comes. But not everyone. We may actually prefer to
Asad Dossani

10. insure ourselves against market crashes. Even if it means paying
a little extra when markets are strong, it is worthwhile if markets
crash. We can do just this using a strategy called the protective
put.
Here is how it works: Again, suppose you own a portfolio of
stocks in the Nifty index, or you own the Nifty index itself via an
ETF. A protective put strategy buys an out of the money put
option on the Nifty index.
A put option gives the holder the right to sell the underlying asset
at a particular price on a particular date. Suppose the current value
of the Nifty is 8,000. And suppose we buy a 3 month put option
on the Nifty index with a strike of 7,800.
At the end of three months, if the Nifty is above 7,800, the option
expires worthless. If the Nifty is below 7,800, the option gives us
the difference between 7,800 and the value of the Nifty. Suppose
the Nifty closes as 7,700 after three months. Then the option has a
payoff of 100.
Why is this an attractive strategy? Well, it makes money if there
is a large fall in the markets. If the markets do not fall much or
rise, then we lose the initial premium paid for the option.
The good news is that because it is an out of the money put
option, the premium will be small. And more often than not, the
Nifty won't crash. But on the occasion that it does crash, we get a
large payoff.
And this is biggest attraction of the protective put. It puts a cap on
how much we can lose in the stock market. If we own a stock
portfolio, and that portfolio falls in value during a market crash,
the protective put's profit will offset the fall in the value of our
portfolio.

11. It is best to think of the protective put as an insurance
policy. We pay a small premium to protect our portfolio. In
the event of a market crash, our portfolio losses are capped.
There are two ways we can use the protective put. One method is
to regularly buy out of the money put options. This would keep
you always insured against a crash. The motivation for doing this
is to reduce risk, not necessarily to increase returns.
The second method is to only buy a protective put only if we
expect markets to crash. In this case, it is more speculation rather
than insurance, but can possibly increase returns.
A protective put can be used to insure against the market index or
a single stock. It is a versatile strategy, and one worth considering
for your portfolio.
China's
economic
slowdown: 11
things you
should know
Updated by Matthew Yglesias on September3,
2015, 7:01 a.m. ET @mattyglesias matt@vox.com

12. TWEET (133) SHARE +
A Chinese day trader watches a stock ticker at a local
brokerage house on August 27, 2015, in Beijing,
China.Kevin Frayer/Getty Images
China is the world's second-largest
economy, after the United States, and it's
been growing so rapidly for so long that
rapid Chinese economic growth has
become part of the landscape for an entire
generation.
Yet in recent years, people have been
warning that the model underlying that
rapid growth is unsustainable. And it now
looks like the summer of 2015 is the time
at which the unsustainable trend finally
came to an end.
1) China's economy is in a
lot of trouble
China has been experiencing a stock
market crash all summer, but since that
crash was preceded by a ridiculous

13. months-long stock market boom it wasn't
initially obvious that this had enormous
implications for the real Chinese economy.
More recently, however, it has become
clear that there are serious issues in terms
of China's real output of goods. You can
see this in a sharp contraction in
shipping through Singapore, a general
decline in the volume of world trade,
and the falling price of the Australian
dollar, all of which are ripple effects of
China importing fewer raw materials and
seemingly exporting fewer finished goods.
Meanwhile, China has been furiously
cutting interest rates in an effort to
stimulate its economy. So far, however,
that hasn't seemed to have generated
much growth. (It's not yet clear if this
monetary stimulus is at least generating
inflation, which would have implications for
the possible effectiveness of further rate
cuts down the road.)

14. 2) Chinese economic data
is low-quality
One very serious issue in writing about the
Chinese economy is that to understand
what's going on you often need to make
inferences based on data out of Singapore,
Hong Kong, Australia, or other places that
enjoy strong economic links to China. The
problem is that China's authoritarian
political system makes it very difficult to
regard any of its economic data as reliable.
Back in 2007, Li Keqiang — now the
number two figure in the Chinese
government — observed that Chinese
economic statistics are "man-made" and
therefore unreliable. Some progress has
been made since then in improving their
rigor. But these statistics are not just man-
made, they are the product of a closed and
opaque political system with no press
freedom, so it would be very difficult for
abuses and problems with the data to
come to light. What's more, since the

15. Chinese government clearly engages in
censorship and information control to
maintain its authority, there is no reason to
believe it would be forthright about
releasing bad economic news.
Even market-based Chinese data like
stock prices is unreliable because the
government has taken to intervening
forcefully to manipulate share prices. You
can infer broad trends from the more
reliable foreign data, but to have a finer-
grained sense of what's going on you
would really need accurate Chinese data,
and it simply doesn't exist.
3) Chinese growth was
based on unsustainable
levels of investment
For the past five or six years, Chinese
economic growth has been powered by a
mind-boggling level of investment spending
— both public and private sector.

16. Investments are things that produce an
ongoing flow of services in the future. That
means everything from new highways and
subway tunnels to new apartment blocks
and factories. And, to be clear, investment
is good! All else being equal, a nation that
spends a large share of its income on
investment goods is better positioned for
long-term growth than a nation that spends
a large share of its income on short-lived
consumption goods.
But in practice, there's only so
much useful investment than can be made
in any given span of time. In a very poor
country, there should be tons of
opportunities for investments with high
payoff. But over time, you expect

17. diminishing returns to set in and the level
of investment to fall. In China, however,
investment had been accelerating even as
the country got richer — a trend that pretty
clearly needed to reverse.
4) China needs to switch to
"consumption-led" growth
It's also been clear for some time now that
to put itself on a sustainable basis, China
needs to shift to a more conventional
consumption-based growth model. In other
words, it needs a smaller share of its
population employed in things like building
roads and factories and a larger share of
its population employed in things like
driving cabs and selling cars.
This is not a particularly controversial idea,
in theory. Indeed, it's been the official
policy of the Chinese government for
years now. The problem is that the
practical implications of actually doing it
are tricky.

18. 5) Even if China's reforms
work, growth will slow
In a very short-term sense, you can always
swap out a dollar of investment for an extra
dollar of consumption. But because useful
investments lay the groundwork for future
production, this switch has implications for
medium-term growth. As economist Tyler
Cowen writes, "There is no simple way to
switch to a 'consumption-driven' economy
without the growth rate both falling and
staying permanently lower."
As long as there are useful investments to
make, then growth fuels more growth. You
build a mine to dig for coal, then you build
a power plant to burn the coal, then you
build a cement plant to use the electricity,
then you build a factory to manufacture
more mining equipment, and so forth.
Once you start running out of investments,
however, this accelerator process is going
to collapse, and the sustainable rate of

19. growth will slow dramatically — even if you
pull off the switch to consumption.
6) Inequality and a weak
welfare state hurt Chinese
consumption
China is a nominally socialist society run
by a self-proclaimed Communist Party, but
it actually features sky-high inequality
and a weak welfare state.
Rich people spend a lower share of their
income than poor people, and working-age
people spend a lower share of their income
than retirees. Consequently, a more robust
social welfare state that did more to
transfer economic resources from the
wealthy to the poor and the retired would
help bolster consumption and put the
Chinese economy on more sustainable
footing.

20. 7) A sharp growth
slowdown would be
historically typical
China's economic success story over the
past 30 years has been incredibly
impressive, and due to the country's vast
size it's been incredibly important. But such
success is far from unprecedented. A
number of other countries have gone
through the basic cycle of very rapid
export-led industrialization — often leading
internal and external observers to believe
that the rapid pace of growth can be
sustained indefinitely.
In their paper "Asiaphoria Meets
Regression to the Mean," Lawrence
Summers and Lant Pritchett show that this
has not been the case for earlier growth
miracle countries. It's not just that growth
slows down from its peak blistering pace
(which essentially everyone concedes).
They find that growth slows all the way
down to a global average level, with no

21. persistence whatsoever of past excellent
performance.
8) The big question: Will
China undergo a slowdown
or a recession?
Trading Economics
A recession, in conventional terms, is when
an economy actually shrinks — something
that hasn't happened for decades in China.
But in countries like the United States, the
baseline level of "normal" growth is pretty
low — 2 or 3 percent per year — so it only
takes a relatively modest decline in the

22. growth rate to push you into negative
territory.
China is different. Like most countries
around the world, it had a bad year in
2009. But in Chinese terms, "a bad year"
still meant a growth rate of more than 6
percent followed by a snapback to almost
12 percent. Growth has slowed
considerably since then, and by all signs
things are much worse in 2015. But one
crucial question is whether China is simply
going to slow down a lot — to something
like 2 or 3 or 4 percent — or whether
there's actually going to be a recession.
9) High levels of debt could
make the slowdown worse
One potential problem is that in recent
years, Chinese businesses and
households have taken on a lot of debt.

23. BlackRock

24. Going into debt isn't always a bad idea. In
fact, given the very fast growth rate of the
Chinese economy between 1995 and
2015, most Chinese companies probably
would have been better off
borrowing more money in the 1990s.
But if you borrow money expecting an
average 7 percent annual growth rate and
only get an average 2 percent annual
growth rate, then you could wind up in a
world of trouble. Potentially, even, in a
spiral of bankruptcies and financial crisis
that lead to a recession.
10) Chinese politics hamper
an effective response
The combination of rapid 21st-century
economic growth in China, political crises
in the United States, and China's
authoritarian political system sometimes
leads Western commentators to dream
hazily about the virtues of Chinese
authoritarianism in cutting through the

25. nonsense and letting leaders do what
needs to be done.
The reality, however, is that authoritarian
political systems still have politics.
There are still interest groups, and public
officials are still sometimes more loyal to
particular interests than to the good of the
nation. This is a crucial issue in China's
rebalancing process. It's easy for an
outsider observer to say that inefficient
state-owned enterprises should be shut
down. It's harder for a government official
who needs to worry about lost jobs. It's
easy for an outsider to say that China
needs more income redistribution. It's
harder to defeat the political power of rich
Chinese people who would rather the
country not do that. It's easy to say China
needs to spend less on construction
projects and more on social services. But
to do that you need to overcome the
entrenched interests of the contractors who
benefit from the projects.

26. China's leaders give every indication of
being broadly aware of the nature of the
country's problems and the kinds of
solutions that are needed. What's less
clear is that they can actually deliver these
solutions.
11) This summer has
shaken faith in China's
leaders
Much of this has been in the air for years.
The reason it's coming to a head now is
that the stock market bubble and
subsequent collapse have shaken faith in
the Chinese government's ability to form
and execute coherent policy.
When the bubble was on its way up, the
government tried — and failed — to slow it.
Then when it started to pop, the
government tried — and, again, failed — to
slow the pace of the collapse. China
devalued its currency to boost its
economy, but didn't go far enough. It's cut

27. interest rates repeatedly, only to find that it
needs to cut them again. Now the
government seems to be arresting people
who express negative opinions about
the stock market outlet.
This summer's events have laid bare the
reality beneath the incredible successes of
the past 20 years. China remains a middle-
income country with shaky economic
institutions and an opaque and
unaccountable political system. Three
decades of stellar growth starting from a
rock-bottom floor have landed China at a
level of per capita prosperity that's similar
to Serbia or Peru or the Dominican
Republic — places that nobody regards as
obviously amazing investment
opportunities even though in some ways
their political systems are more solid than
China's.
Loss of faith has a self-fulfilling aspect to it.
To the extent that people believe China
can conquer its present-day challenges,
actually conquering them becomes easier.

28. To the extent that people begin to write
China off, then it will have greater
difficulties in pulling off the kind of
transition the country needs.
Why China fears are overblown: Stephen Roach Growth in China
has slowed, Roach acknowledged in a CNBC "Squawk Box"
interview, "but it's not going in for a crash … and that will present, I
think, an opportunity for shares to re-evaluate the China threat, big
time." STEPHEN ROACH Former Chairman, Morgan Stanley More
about the Expert... Investor concerns in the U.S. stock market of a
"crash-landing scenario" for the Chinese economy are misplaced,
former Morgan Stanley Asia Chairman Stephen Roach said Thursday.
"I think those fears are vastly overblown," he said. Growth in China
has slowed, Roach acknowledged in a CNBC "Squawk Box"
interview, "but it's not going in for a crash … and that will present, I
think, an opportunity for shares to re-evaluate the China threat, big
time." The influential Yale economist did fault the Chinese for poorly
handling the turmoil in its financial markets. "They did not do a great
job of handling the equity market bubble on the upside by

29. encouraging it and fighting it on the downside," Roach said. He played
down last month's devaluation of China's currency, saying the more
important development there has been the progress in transitioning
from an export-led to a more consumer-led economy. Read
More: Risk of big stock drops grows: Robert Shiller Roach cited an
August report from the International Monetary Fund. "They pointed out
for the first time that domestic consumption is contributing more to
overall GDP growth in China than investment. That is a big shift."
"Structural change ... is very, very hard to do and normally takes a
much longer period of time," he said. The transitioning Chinese
economy was a theme Treasury Secretary Jack Lew, in an exclusive
interview with CNBC, touched on. "There needs to be a set of reforms
put in place where the economy becomes much more market
oriented, where consumer demand grows and there's a shift from a
heavy, heavy emphasis on investor spending to more consumer-
driven spending," Lew said. Read More: Jack Lew: We're going to
hold China accountable In an IMF report released Wednesday, the
group warned that China's slowdown, volatile financial markets, and
tumbling raw-materials prices have raised the risks to economic
growth around the world. The assessment published as top finance
ministers and central bankers meet this week in Turkey did not revise

30. the IMF's forecasts for world growth this year, last updated in July. But
the IMF did conclude that "downside risks have risen." "The world has
relied on China as its major engine of global growth," so the slowdown
does pose a threat, Roach said. He added that critics who put
Chinese growth at half the published government rate there of about 7
percent "don't have a shred of evidence."
Read more at: http://www.moneycontrol.com/news/asian-
markets/why-china-fearsoverblown-stephen-
roach_2910721.html?utm_source=ref_article
The renminbi is the official currency of the People's
Republic of China. The name (simplified
Chinese: 人民币; traditional
Chinese: 人民幣; pinyin: rénmínbì) literally means "people's
currency."
The yuan (元/圆) (sign: ¥) is the basic unit of the renminbi,
but is also used to refer to the Chinese currency generally,
especially in international contexts. The distinction between
the terms renminbi and yuan is similar to that
between sterling and pound, which respectively refer to the
British currency and its primary unit.[3]
One yuan is

31. subdivided into 10 jiǎo (角), and a jiǎo in turn is subdivided
into 10 fēn (分)
15/08/2015
China,the Fed and emergingmarkets
Yuan thing after another
A cheaper yuan and America’s looming rate rise rattle
the world economy

32. THE cloud hanging over emerging markets seemed to
darken in the past week. As it was, fears that the Federal
Reserve is about to raise rates, pushing up debt-servicing
costs and sucking capital out of emerging markets, had
been weighing on currencies and stockmarkets from Brazil
to Turkey (see chart). Now a fresh worry is blotting the
horizon. On August 11th China engineered a small
devaluation of the yuan, prompting concerns that, with
growth sputtering, its government was ready to risk a global
currency war.
The angst about the state of the world’s two biggest
economies is understandable. China’s economy has slowed
markedly: it is likely to grow by 7% this year, its most
languid rate in a quarter-century. In addition the
government has been trying to reorient the economy from
investment to consumption. For emerging markets that had
been catering to China’s investment binge—those selling it
coal and iron ore, copper and bauxite—the past few years
have been little short of brutal. The economy’s slowing and
rebalancing explain much of the 40% fall in commodity
prices since their peak in 2011 and, by extension, the
travails of countries which make their fortunes digging stuff
out of the ground, from Peru to South Africa.
For other emerging markets, the importance of China as
a source of direct demand is less pronounced. Exports

33. to China account for less than 9% of total shipments
from developing countries, calculates Jonathan
Anderson of Emerging Advisors, a consultancy, whereas
exports to the rich world account for 55%. For countries
exporting food and fuel—the majority of the global
resource trade—China’s slowdown has had a limited
impact. Except for a small group of countries heavily
concentrated on exports of ores and minerals, “China
has hardly mattered at all,” he says.
China can make itself felt in other ways, however. A
slowdown in the world’s second-largest economy, for
instance, is bound to have second-order effects on
demand. Deflation in China puts pressure on firms in
other emerging markets to cut prices. And some worry
that the yuan’s fall may initiate a series of competitive
devaluations, with other exporters racing to weaken their
exchange rates or, perhaps, resorting to trade barriers
as a last resort. Fortunately, the changes to China’s
exchange-rate regime do not seem nearly big enough to
set such a vicious cycle in motion. Even after its
devaluation, the yuan remains stronger than it was a
year ago in trade-weighted terms. Moreover, the
authorities are now intervening to slow its decline. In
other words, the depreciation is a small, belated step to
keep the yuan’s value in line with those of its peers, not
a dramatic shift in exchange-rate policy.
China’s slowdown continues to amplify jitters about the
Fed’s impending “lift-off”. The sensitivity of developing
countries to changes in policy at the Fed was amply
illustrated by the “taper tantrum” of 2013, when the
announcement that it would slow and eventually stop its

34. huge purchases of government bonds led to turmoil in
emerging markets.
An American rate rise, which may come as soon as
September, could put pressure on emerging markets in
a variety of ways. Rising rates will add to the allure of
American assets, potentially making the dollar even
stronger. For the governments, households and firms in
the developing world that have borrowed trillions of
dollars in recent years, interest and repayment costs will
climb in terms of local currency. If fears about their debts
lead to more outflows of capital, central banks in the
weakest countries will face an invidious choice between
letting their currencies plummet and ratcheting up
interest rates to defend them. The former will only
aggravate the burden of their foreign-debt load; the
latter will stifle growth. Bill Gross, the world’s best-known
bond manager, has spoken of a “currency debacle” for
emerging markets.
Not all agree that higher American interest rates need
spell doom. That the Fed has been edging towards lift-
off is no secret. Anticipation of this is one reason for the
dollar’s recent strength. If its tightening is gradual, as
expected, emerging markets may fare better than
feared.
The presumption that the dollar strengthens when the
Fed raises rates is not borne out by evidence. In the first
100 days of its four big tightening cycles of the past 30
years, the dollar has actually weakened every time,
according to David Bloom of HSBC, a bank. The notion
that Western central banks’ efforts to keep interest rates
low sent a torrent of money into emerging markets that

35. is now about to drain away may also be wrong. Average
quarterly flows from America to emerging markets were
actually higher before the crisis, according to Fitch, a
ratings agency. If so, monetary policy in America may
not be the be-all and end-all for emerging markets. That,
at any rate, will be their hope.
China’s Yuan devaluation may hit Indian exports
NEW DELHI: China's unexpected decision to devalue the yuan in a
bid to boost sluggish overseas sales has come at a particularly bad
time for India, experts said.
It's also raised the possibility of a currency war as countries battle for
a share of the slow-growing global export market. India's exports have
contracted for the past eight months amid an erosion of
competitiveness, impacting domestic recovery and also potentially
threatening the Narendra Modi government's Make in India
programme. This aims to turn India into an export-led manufacturing
centre to create jobs, lift incomes and hasten growth.
On Tuesday, China's central bank cut the yuan's daily-fixing rate by a

36. record 1.9%, leaving Indian exporters a worried lot.
"This is not good news for Indian exports. This will further dent the
competitiveness of Indian exports," said Ajay Sahai, director general
and CEO of the Federation of Indian Export Organisations lobby
group, echoing frustrations over the "oneoff depreciation" by the
Chinese central bank that has taken the yuan to a three-year low.
"It will not just hurt Indian exports to China but largely to third
countries. India already has a trade deficit of close to $50 billion with
China," Sahai said. Finance secretary Rajiv Mehrishi said the move
seems to suggest that China is moving toward a flexible exchange
rate.
"In my opinion, it should have some impact on our exports. Exports
from China would be cheaper," he said, adding that it was difficult to
quantify the impact.

37. Companies see the move squeezing margins. "It could increase
margin pressure on India's exports where we compete with China,"
said Anil Bhardwaj, secretary general, Federation of Indian Small and
Medium Enterprises. The Chinese central bank devalued the yaun
after data showed growing trouble for the world's second biggest
economy that has been hit hard by the near 15% trade-weighted
appreciation over the past one year.
China's exports fell 8.3% in July suggesting further weakness in the
economy that's likely to grow at a 25-year low of below 7% this year.
Attempts to revive the Chinese economy through devaluation spells

38. trouble for everybody else. India is battling a loss of competitiveness
because of the relative appreciation of its currency against those of its
competitors.
ET Now: China has devaluated its currency to boost its flagging
exports but it is also a move that could deepen global currency
wars. What is your assessment of the situation?
Nick Parsons: There were both internal and external pressures on
China. Internally, it came from the sluggish pace of domestic demand
and export growth but externally, there had been a push from China to
try to have more international recognition of the currency. Now the MF
did make some fairly scathing references in a report a couple of
weeks ago about the lack of market liberalisation and the degree of
control that the Chinese authorities were still exerting over rates. They
made it clear that until this was market-determined, they would have
to delay SDR interest.
ET Now: Asian currencies have been facing pressure due to
the impending US rate hike, so will the series of moves from
China make it worse?
Nick Parsons: This will worsen the background for Asian currencies.
The worst performing currency in Asia is the Malaysian ringgit which is

39. down almost 9% and losses extend to 6% for others. So, we are very
much in an era of competitive devaluations. If we look at the ADXY
index, the US dollar against the basket of Asian currencies, we have
just gone through the low that we saw in 2010. So, we are through
that old low and if you go back to JFC, the charts are suggesting that
there is perhaps as much as another 7% still to go on that particular
matrix. The ADXY signals further losses. Technically, it is looking very
vulnerable and fundamentally, the arguments in favour of September
rate hike would tend to push it that way.
China's bubble burst after an
expansion driven by superstition
Chinese government policies succeeded beyond
expectations in boosting the stock market as investors
fuelled a speculative boom. Prices rose around 250 per cent
in around two years, including a rise of 26 per cent in a
single month. Daily turnover quadrupled. At one stage,
more than 500,000 new trading accounts were being
opened weekly. China’s stock market expanded rapidly,
overtaking Japan’s to become the world’s second largest.
Retail investors played a major role in the rise of share
prices. In the reverse of the position in developed equity
markets, Chinese retail investors rather than institutions
dominate turnover, accounting for up to 90 per cent of daily
trading. There are probably more than 100 million share

40. trading accounts (around 8 per cent of the total
population), which compares favourably with the 88 million
members of China’s Communist Party.
The average investor is middle to low income, with more
than 60 per cent lacking a high-school diploma. Much of the
trading is speculative, driven by the lure of seemingly easy
money, and much is short term, with very high intraday
activity. At the height of the boom, trading activity on
Chinese exchanges was greater than anywhere else
worldwide.
Trading was driven by superstition including astrology,
numerology and charms. In an echo of the conditions before
the 1929 crash, one investor admitted to investing on the
advice of her hairdresser. In June 2015, prices corrected. No
clear, single factor appears to have triggered the price falls.
The market simply ran out of momentum and investors lost
confidence.
The effect of falling prices was amplified by the leverage, in
the form of margin loans. At its peak, these reached around
$350bn, around 12-14 per cent of the stock market size. In
comparison, the level of margin loans is around 5-6 per cent
in the US and 1 per cent in Japan. Fallingprices triggered
margin calls, forcing liquidation of positions as investors
needed to raise cash or could not meet demands for
additional collateral.
As the market plummeted and price changes became
disorderly, authorities responded with a mix of communist
propaganda and capitalist tricks. The media blamed short
sellers and market manipulators. Patriotic calls sought to
discourage investors betting on price falls. Chinese police
instigated ritual investigations into short selling to scare
even legitimate sellers out of positions.

41. Following the emergency plunge protection guidelines
patented by the US authorities, the Chinese central bank
pumped money into the financial system. Interest rates
were cut. The reserve ratio and loan-to-deposit limits were
altered to allow banks to increase lending. Margin finance
rules were relaxed allowinganything from property to
antiques to be used as collateral for loans.
As the rout continued, the government-controlled Securities
Association of China arranged for the 21 big brokerage firms
to establish a fund worth around $20bn (£13bn), to buy
shares in large companies. China’s securities regulator
banned major shareholders (with stakes exceeding 5 per
cent), corporate executives and directors from selling their
shares for six months. State-owned enterprises (SOEs) and
investment vehicles were instructed not to sell shares. There
were suggestions that some SOEs may buy back their own
shares to support prices. New listings were deferred. With
planned share offerings exceeding $600bn, the authorities
sought to limit the claims on available investor funds.
Beijing encouraged companies to apply for trading halts.
This resulted in suspension of trading in about 1,400
companies listed on Chinese exchanges, representingmore
than $2.5 trillion worth of shares, or 40 per cent of the
stock market capitalisation.
Eventually, the market stabilised, regaining a part of the
fall. The intervention mainly helped the share prices of big
SOEs, such as PetroChina. The broader market, particularly
small-capitalisation stocks, remains fragile. After the 30 per
cent fall, the Chinese market remains 70 per cent above its
mid-2014 levels.
But stock market valuations remain stretched. Even after
the recent drops, Chinese shares, particularly in technology
firms, are not cheap. The post-crash median valuation of

42. stocks on the Shanghai and Shenzhenexchanges is almost
three times that of the companies listed on the Standard &
Poor’s 500-stock index. Margin debt levels remain high.
Given the centralised political and economic command and
control in China, it is unwise to assume that the authorities
cannot prop up share markets. Large foreign exchange
reserves ($4trn) and the ability to use state-controlled
banks to expand balance sheets gives the government plenty
of scope to buy shares.
But expanding credit risks increasing inflationary pressures
and further complicating the task of dealing with a large
pre-existing credit bubble. Intervention might push up the
value of the Chinese yuan, cancelling out today’s
devaluation and making China’s embattled exporters even
less competitive. Chinese authorities are discovering an old
truth – bubbles are hard to see and even harder to catch.