Policy Alert #107 | August 26, 2015

A near-9 percent dive in China shares sent world stocks and commodity prices tumbling on Monday amidst deepening concerns about a China-led global economic slowdown and crashing commodities prices. This Policy Alert examines reactions from China, India, Russia, South Korea, Japan, and Russia to the ‘Black Monday’ stock turmoil.

CHINA

Following a poor week that saw an 11-percent drop in its market value, Chinese stocks nosedived again on Monday with the benchmark Shanghai Composite Index plummeting 8.49 percent to close at 3,209.91 points, the sharpest decline in more than eight years.

• China’s central bank on Tuesday cut its benchmark interest rates and the amount of cash banks must keep on hand, the latest stimulus aimed at boosting the world’s second-largest economy as it battles a collapse in share prices. The People’s Bank of China (PBoC) announced on its website that it was reducing lending and deposit interest rates by 0.25 percentage points each and its reserve requirement ratio (RRR) by 0.50 percentage points. China’s “economic growth rate remains under pressure”, the PBoC said in a statement, adding the cuts were meant in part to “support the real economy to continue to develop healthily.”
• “Given the dire consequences of panic sales that could wreak worse havoc than expected on investors as well as the national economy, it is absolutely necessary for the Chinese authorities to come up with more and stronger supportive measures to arrest the downward spiral of share prices,” argued China Daily senior writer Zhu Qiwen. “Yet, while emergency measures are well justified to stop the hemorrhaging of the stock market, it does not mean policymakers should shore up equity prices at any cost. Instead, policymakers should try to find a workable middle path after first identifying the real causes behind the plunge of share prices.”
• Andrew Sheng, distinguished fellow of the Asia Global Institute at the University of Hong Kong, stressed that “If China is to avoid the deflation trap, revive investment, bolster competitiveness and accelerate long-term growth, it must continue its quest to foster the animal spirits of innovation and entrepreneurship.”
• “China has bid goodbye to double-digit economic growth, and has entered the “new normal” of growth on a medium-to-high level. But compared with the other major economies in the world, China’s performance is still one of the best,” opined the state run Global Times.
• China’s economic slowdown and a sharp fall in its stock market herald not a crisis but a “necessary adjustment” for the world’s second largest economy, according to Carlo Cottarelli, a senior official at the IMF.

INDIA

India’s benchmark Sensex bourse plummeted 1,624.51 points – almost 6% – Monday to its lowest level since August 2014 at 25,741.56, while the country’s rupee currency fell to its lowest in 23 months at 66.64 against the U.S. dollar. Nonetheless, commentators remained optimistic over India’s ability to withstand shock in the global stock market.

• Asserting that the global market turmoil is not a cause of worry for India, Finance Minister Arun Jaitley said the crisis should be converted into an “opportunity” for India to speed up reforms.
• Minister of State for Finance Jayant Sinha noted that the weakening of the Indian rupee against the US dollar is a market response to China devaluing its yuan to ensure that Indian business remains competitive. “We have this period of adjustment and re-adjustment which we are going through and that will naturally create some turbulence in the market. Thankfully, we in India are well positioned to get through this turbulence,” he stated.
• The Indian economy can withstand the fallout of Monday’s stock market plunge with the reform measures taken by the Indian government and Reserve Bank of India (RBI), according to RBI deputy governor S.S. Mundra.  Mundra said the current problems are transient, driven by interconnectedness of the world economies, and that India is capable of dealing with any kind of external shocks.
• An op-ed in the Hindu argued, “For India, the Chinese collapse might actually provide anopportunity…India has a low current account deficit (CAD), the fiscal deficit is manageable, inflation is moderating and short-term foreign currency liabilities are low. Despite a downward revision by global rating agencies in the growth forecast, growth is still fairly robust compared to other major economies.”
• The Indian Express pointed out that “a depreciation in the rupee in line with the devaluation of the yuan will help Indian exporters stay competitive, and help attract foreign direct investment into the country.”

SOUTH KOREA

South Korea’s benchmark stock price index, KOSPI, dropped 2.47 percent on Monday. The continuous sell-off by foreign investors is a major concern for Korea’s stock market, as foreigners account for 32 percent of total stock holdings. Foreign investors have sold off 3.2 trillion won ($2.7 billion) worth of Korean stocks in the last two weeks. Analysts in Seoul are also monitoring the Chinese economy, which is closely linked with South Korea.

• Hong Seung-pyo, an analyst at Samsung Securities compared the difference between the current stock turmoil and the 2008 financial crisis. “Back then, the companies suffered from lowered corporate credit lines and had to sell assets. Now, the problem is an overall slowdown in the global economy.” Hong expects that even if the selling continues, the size of the exodus will be smaller than in other emerging markets.
• “Problems in China are having a direct impact on South Korea since the country is heavily dependent on its neighbor for trade,” a government insider told the Korea Observer. China is South Korea’s largest export market.
• “South Korea is currently being confronted by a host of tough challenges all at once,” said Jee Man-soo, a research fellow at the Korea Institute of Finance. He predicted for the time being, problems facing China will not easily die down and could escalate downside risks for South Korea and other countries.
• The JoongAng Ilbo warned that “we must be fully ready for all possible scenarios” given that “investors at home and outside have lost confidence in the Chinese government’s interventionist policy… experts as well as investors mostly believed that the Chinese authorities had the capacity to control the economy and finance. But skepticism now prevails due to the disastrous fallout from interventionist policy that aggravated market volatility.”

JAPAN

After a roller-coaster ride, stocks closed sharply lower again on the Tokyo Stock Exchange on Tuesday, pushing down the benchmark Nikkei average below 18,000 to the lowest level in more than six months.

• While the market turbulence may stabilize at some point, Japan should brace for a “China shock” to the global economy, particularly in view of the growing dependency of its economy on Chinese demand – including the spending spree by the record numbers of Chinese tourists who are visiting the country, warned the Japan Times.
• Yoshihiro Ito, chief strategist at Ikasan Online Securities Co. likened the fall in Japanese stocks to an “equity clearance sale.” “Selling is spurring more selling in a vicious cycle. Individuals have been watching to see how things pan out in the U.S. and China and now think selling won’t stop. What happens next all depends on the U.S.”

RUSSIA

The Russian ruble plunged 2.3 percent on Monday to hit a seven-month low amid a further drop in oil prices, the country’s key export. The ruble traded at 70.7 to the dollar in early trading in Moscow, its lowest level since January 30, when Russian markets were hit by a combination of low energy prices and Western sanctions. Despite the drop, coverage of ‘Black Monday’ in Russian media remained scant.

BRAZIL

With Brazil’s economy already suffering from the slowdown in Chinese demand for its commodity exports, further signs of weakness in the Chinese economy made the stock market plunge a major news story.

• In an interview with O Globo, President Dilma Rousseff, suffering from rock-bottom approval rates amid a concurrent weakening economy and major corruption scandal, placed the “Chinese crisis” in the context of a general slowdown in Brazil’s international outlook saying, “there is a situation of an international deceleration , and we are going to have to deal with that. And not just us.”
• Folha de São Paulo reported that President Rousseff’s advisors are worried that increased turmoil in China could heighten the risk of Brazil’s current recession–which is already its longest since the 1930s–continuing into 2016, further limiting the government’s ability to implement the fiscal adjustments considered necessary by most analysts.
• Following a cabinet meeting, Minister of Planning Nelson Barbosa said in a statement that Brazil possesses two elements that will help it weather the crisis in China. “We have an elevated stock of international reserves that give Brazil the security and capacity to adjust to currency fluctuations without generating financial problems. We also have a fiscal agenda for the short, medium and long term that will guarantee a consistent fiscal policy and the stability of the public debt in the medium term.”
• The newspaper
• Estado de São Paolo used ‘Black Monday’ to criticize President Rousseff for failing to adjust the economy to deal with slowing Chinese demand. According to the editorial board, “More attentive governments understood the urgency required for adjusting the composition of their exports, and especially their dependence on China. The Brazilian government, on the other hand, continues privileging South-South trade and giving little mind to the problems of productivity and competitiveness of Brazilian industry.”