Although Beijing attempted to arrest the free fall over the weekend, by pumping liquidity into the system, the Chinese stock markets continued to fall on Wednesday. Analysts fear India needs to look at the Chinese stock markets more closely as compared to the greek market collapse, as China’s markets are more closely linked to India than Greece is. According to the Financial Times, The Shanghai Composite opened down as much as 8 percent before paring losses to a 4.7 percent decline by 11:15am local time today. The Shenzhen index lost 3.3 percent, while the start-up ChiNext board was down 0.2 percent.
The renewed selling followed another round of share suspensions overnight, which have now halted trading in 1,476 stocks — or more than 50 percent all listed companies on China’s two main exchanges. The suspensions have frozen US$2.6 trillion worth of equity, according to Bloomberg calculations In typical Beijing style of controlling the markets, The People’s Bank of China, the country’s Central bank said it was helping state-owned China Securities Finance Corporation access liquidity through “interbank lending, financial bond issuance, collateral finance, and re-lending”.
The central bank will also continue to help the fund “hold the line against the outbreak of systemic or regional financial risk”, it said. A lack of liquidity is creating a major fear psychosis in Beijing as social unrest is expected to spiral out of control. 80 percent of investors in Chinese stock markets are small retail investors, leading to the growing threat of rising disent against the government which until now had been able to manage everything, including the looming property bubble. While analysts fear the drop in the stock market could be the tip of the iceberg of a downward spiral for the Chinese economy – afterall how much can Beijing control? Others are optimistic this correction will resolve itself soon.
Nonetheless, this massive dip in Chinese stock markets is expected to have an impact in India, albeit over the medium to long term as companies – both state and privately owned hold on to extra cash and curtail trading or investments in India. While the Chinese stock market might not have a direct impact on the Indian stock market, liquidity drying up has been a looming threat within China for a while now. Austerity measure by the government have worked, but a lot of Chinese money remains parked outside the country.