INTRODUCTION

Every global recession since the OPEC oil shocks of 1973-74 was triggered by a contraction in the $17
trillion US economic colossus. The failure of Lehman Brothers, the meltdown in US subprime mortgages,
the impotence of the implicit "Fed/Uncle Sam" put, the ice age in the commercial paper and interbank
money markets all tipped the US economy into recession in late 2008 and triggered a global economic slump
and financial market bloodbath. The impact on the Middle East was catastrophic. Brent crude fell from $148
in July 2008 to less than $40 six months later. There was a depositor run on a major Kuwaiti bank. Gulf
property and share prices plunged 50-70 per cent in 2009-11.

Yet as I scan the world of late-summer 2015, I am convinced the next global recession will originate from
the $10.4 trillion Chinese economy, whose growth rate has slumped to its slowest pace since 1990. China's
trillion-dollar shadow banking system, Marxist-Leninist wealth management Ponzi schemes and
Beijing/local government borrowing have built up the biggest debt load in the history of humankind, now a
staggering 250 per cent of GDP. The $4 trillion bloodbath in the Chinese stock market this summer has not
been amplified by draconian state intervention that included banning sales by strategic shareholders, stock
manipulation, price rigging and trading suspensions of listed companies in Shanghai/Shenzhen.
Unfortunately, this "Beijing put" will not prevent a Chinese economic bust and history's first "Made in
China" global recession.

President Xi Jinping has consolidated more political power than any Chinese leader since the death of Deng
Xiao Ping. Yet his frequent purges (not even Politburo apparatchiks, Party princelings or cabinet ministers
are immune), economic restructuring and anti-corruption campaign has had a chilling impact on consumer
spending/capex at a time when the People's Republic's most savage leveraged stock market bubble has just
blown up. Think October 1929 in New York, December 1989 in Tokyo. Not even monetary largesse from the
People's Bank of China will prevent a growth decline in China and a "Chinese lost decade" that will
transform the global economy, asset prices, power politics and financial markets.

China had periodic boom bust cycles/cash crunches in the 1980s and 1990s, the reason the Big Four banks
were recapitalised by the Communist Party thrice in a decade under Premiers Zhu Rongji and Wen Jiabao.
Yet China's domestic economic convulsions had minimal global impact since China's economy had not yet

joined the World Trade Organisation, or become $10 trillion monster that is the largest export destination for
40 countries worldwide, the world's largest importer of copper, coal and steel. In 2014, China contributed 38
per cent to global growth. As the vicious bear market in crude oil, Dr Copper and iron ore ($190 a metric
tonne two years ago, $48 now), the Middle Kingdom is going bust. History will rank the Chinese stock
market bubble in 2014-15 in the same league as Kuwait's Souk Al Manakh crash, Dutch tulip mania, the
Nikkei Dow bubble, dot-com craze in late-1990s Silicon Valley or the Jazz Age financial madness on Wall
Street. Only the Chinese bust will trigger a global recession.

This is the deflation SOS flashed by West Texas crude, Dr Copper, Brazil, Taiwan, South Korean industrial
production/exports and the Australian dollar. Readers of this column know I have been consistently negative
on emerging market commodity exporters since 2012 while the poor souls who believed in them lost vast
fortunes as punishment for their collective macro idiocy.

An asset class where the Russian rouble, Columbian peso, Brazil and Turkish banks all fell 30 per cent in 12
months is an asset class in deep financial distress - and the global recession has not even begun. JPMorgan
was so right: "Liquidity is like a cab on a rainy night. It disappears when you need it the most." The liquidity
shocks will come when the Yellen Fed raises rates amid China's hard landing.

This is the 1998 scenario all over again for emerging markets. Currency depreciation means squat when
world trade shrinks. I expect corporate defaults (Walter Energy just filed Chapter 11), stock market crashes,
commodities meltdowns, bank failures as the malign ghosts of 2008 are resurrected to haunt Wall Street.
This time the wolf is here and wolf is from Beijing.

The Causes and Consequences of China's Market Crash

IT BEGAN innocently enough, with a fall in markets in China that might, at the outset at least, have been
mistaken for the healthy clearing of froth from the world's frothiest stockmarket. Yet the plunge that started
in Asia (and which followed a nasty drop in American markets on Friday) has continued to gather
momentum. It now looks very worrying indeed. When markets in Shanghai closed on Monday, stocks were
down 8.5%the Shanghai Composites worst single-day fall in eight years and, given the daily limits on
how far individual stocks can fall, very nearly the biggest possible decline. The People's Daily, the
Communist party's mouthpiece, declared the day "Black Monday". The nervousness has radiated outward
from China. The Nikkei index in Japan slipped by 4.6%. European bourses are down 4-5%. The Dow
opened down more than 1,000 points; stocks have since regained some ground but the main indices are still
down about 4%. The Eurofirst 300 index has had its worst day since 2009. Germanys DAX has now lost all
the gains it made in 2015.
The pain extends beyond stockmarkets. Emerging-market currencies from the South African rand to the
Malaysian ringgit are tumbling. Commodities are also sinking. Oil has hit a six-and-a-half-year low. A
broader index of 22 commodities compiled by Bloomberg is at its lowest since 1999. Only safe-haven assets
such as government bonds issued by the likes of America and Germany are having good days. Even gold is
down: investors who used it as collateral for buying shares and other assets are having to flog it to meet
margin calls.
Two immediate questions arise: what has caused the jitters in markets, and how much should investors
worry? The first is the easier to answer; the sea of red is down to China and the Fed. Start with China. The
proximate cause for all this is a chain of events that began with the surprise devaluation of the yuan on
August 11th. More than $5 trillion has been wiped off on global stock prices since then. Today's Chinesemarket meltdown seems to have been driven by disappointing data on Friday, which suggested that China's
industrial activity is slowing sharply, and by the failure of the Chinese government to unveil bold new
market interventions today to prop up equity prices.
A weakening outlook for Chinese growth, and a slip in China's currency, have combined to put pressure on
other emerging economiesand especially those whose growth model depends on Chinese demand for
industrial and other commodities. Emerging markets have also been squeezed by the Fed, which has been
preparing the world economy to expect the first interest rate rise in nearly a decade in September. Tighter
monetary conditions in America have led to reduced capital flows to big emerging economies, to a rising
dollar, and to more difficult conditions for firms and governments with dollar-denominated loans to repay.

The global economy is right in the middle of a significant transition, in other words, as rich economies try to
normalise policy while China tries to rebalance. That transition is proving a difficult one for policymakers to
manage, and markets are wobbling under the strain.
How much, then, should we worry? A fall in Chinas stockmarket was hardly unlikely given its dizzying
climb in the first half of the year. Its tumbling should be put in context: the Shanghai Composite is still up
43% on its level of a year ago. The knock-on effects from market turmoil should be limited, at least in the
short run. Relatively little Chinese wealth is stored in shares. More is held in property, the market for which
has stablised in recent months. What's more, China's government has yet to unleash its most potent
interventions; it has room to cut reserve requirements at banks, for instance.
Meanwhile, a replay of the Asian financial crisis of 1997 looks unlikely. Asian governments are in far better
shape to weather these sorts of changes in the economic climate. Currency pegs that triggered trouble in the
late 1990s have largely been replaced by floating-rate regimes, foreign-exchange reserve piles are larger, and
financial systems are better managed and more robust. Neither does a 2008-style meltdown appear to be on
the cards. The global banking system is much more hale than it was on the eve of financial crisis. The
mispricing of entire classes of risk-assets and the interconnectedness of vulnerable financial institutions that
fueled the panic of 2008 are both absent now.
There is nonetheless good reason for concern, if not for panic. Fundamental questions are being raised about
China, an economy which now accounts for 15% of global GDP and around half of global growth. The
government's ability to manage market gyrations and animal spirits is very much in question, suggesting that
a descent into Japanese-style stagnation is a possibility. The odds of a sharp Chinese slowdown will grow if
China's government reacts to market turmoil by ending the process of structural reform that is meant to
facilitate a rebalancing.
The global market rout may also represent a definitive end to the period of rip-roaring emerging-market
growth that began around 2000. Tumbling emerging-market indexes and currencies, from Brazil to Turkey
and Kazakhstan, are further evidence, if more was needed, that the cocktail of Chinese growth, low interest
rates and soaring commodity prices that powered emerging-market growth has been yanked away, leaving
the developing world to face the hangover. That hangover may not take the form of a broad financial crisis.
A protracted slowdown, however, would be plenty painful enough, especially if weak growth leads to
political instability.
With emerging markets faltering and Chinese rebalancing incomplete, rich economies are left as the lone
engine of economic growth. That is a worrying prospect. Europe's recovery remains fragile and exportdependent. America's is more robust. But while American banks are healthier and consumers less indebted
than they have been in more than a decade, the American economy also accounts for a smaller share of

global GDP than it did in the 1990s or 2000s, when the American household was often relied upon as the
global shopper of last resort.
Perhaps more importantly, rich-world governments have exceptionally little wriggle-room to act to boost up
their economies. Interest rates are still at rock bottom, if not negative. Debt and deficits remain at levels that
would inhibit recession-busting spending policiesif there were much appetite for such spending, which
there is not. In 1998, when troubles in Asia rattled American markets, the Fed swiftly moved to slash its
benchmark interest rate, by 75 basis points. The Fed is unable to repeat that feat now, and swooning markets
are at least in part a reflection of that fact.
This gloomy outlook was there for all to see before today's market mess. Few seem to have anticipated that it
would have such serious effects so soon.

Why China's Stock Market Meltdown Should Be a Cause for Global Worry
While all attention is fixed on Greece and how world markets will be affected post the No vote to solve the
$382 billion debt problem, a bigger loss in one of the world's biggest financial markets escaped attention
untill this week.

Chinas stock market has lost over $3 trillion in value in less than a month without creating a domino effect
across the world. Chinese markets continued their plunge this week, wiping close to 37 percent off the
markets valuation from June 12 peak. The intensity of the loss can be judged from the fact that it is nearly
twice the market capitalisation of all stocks traded in India and more than the Spanish, Russian, Italian,
Swedish and Dutch stock markets combined.

Normally when one market falls, especially of the size of China, other markets follow suit. China in fact is
the second biggest market in terms of market capitalisation but despite a 37 per cent fall in its value, Dow
Jones, representing the largest market, is down by less than only one per cent in a month. World markets
seem to be dancing to the tune of Greece markets more than the events in China. Chinas fall is not even
being replicated in other emerging markets.

So why is it that China is falling in isolation?

The answer is absence of foreign institutional investors (FIIs) in the country. FIIs exposure to China is
through stocks listed in Hong Kong in what is known as H shares. China prevented entry of foreign investors
in its country. Reuters reports that a landmark scheme linking Hong Kong and Shanghai stock markets
launched last November has failed to get much foreign participation, with concerns about stock ownership
and how trades are settled dogging investors. Even MSCI (Morgan Stanley Capital International) index
decided to delay inclusion of Chinas A share in its list of investable shares.

According to Thomson Reuters data, foreign investors account for less than 1 percent of the mainland equity
market as compared to nearly 25 per cent for India. Thanks to this limited exposure by foreign players
directly in China, a contagion to other markets has been prevented.

But this is likely to be short lived. Investors who have lost money in the recent market crash are retail
Chinese investors. Over 85 per cent of trading volumes in China is from its retail investors.

A crash in the property markets last year forced many retail investors to divert their funds to equity markets.
Government incentives and opening up of relaxed margin funding helped fuel the sharp rally in Chinese
equity markets. Government used all the machinery in its hand including state media to urge public to invest
in stocks.

This has resulted in more stock market investors in China than there are Communist Party members. The
Chinese equity market now has more than 90 million individual investors, according to China Securities
Depository and Clearing Co, compared to the Communist Party's 87.8 million reported members at the end
of last year.

Most of these investors have utilised margin funding facilities and are heavily leveraged. Goldman Sachs
pointed out in a report that the outstanding margin financing, at 2.2 trillion yuan ($355 billion) earlier this
week (more than five times of what it was a year ago), was the equivalent of 12 per cent of the value of all
freely traded shares on the market, or 3.5 per cent of Chinas GDP. Both are easily the highest in the history

of global equity markets, its analysts noted. But with Chinese shadow banks and peer-to-peer lenders also
offering cash to investors, the amount of hidden leverage in the market is estimated to be as much as 50 per
cent higher.

Numerous steps taken by the government failed to prevent the slide. Margin funding norms were relaxed,
new issue launches were cancelled to prevent investors from selling shares in the market to invest in
these issues, exchange fees were lowered, pension funds were allowed to invest nearly 30 per cent of their
corpus in equities, interest rates were cut and investors were allowed to even pledge their apartments to
invest in the market. But none of these have worked.

In the most recent move, China has infused liquidity in its market and has asked Pension Fund manager not
to sell a single share from its portfolio. Late Sunday night, China Securities Regulatory Commission said
that it will uphold market stability by providing liquidity to China Securities Finance, a state unit that makes
margin finance available to brokers. As a result, Chinese market opened with gap of 7.2 per cent higher but
have conceded all the gains and presently trade only 0.7 per cent higher.

Even the state media and opinion makers were roped in to urge investors to hold onto shares for the glory of
the Chinese nation but to no avail.

The Economist points out that the longer term consequences of the correction are more worrying than the
short term one. Economic activity normally slows down after the market falls sharply and fails to recover.

China is already slowing down and the last thing it needs is a stock market crash which will impact
consumption. If the market fall accelerates the economic slowdown, other countries that have not been
affected by Chinas market fall will be hit. After all China is the largest consumer of a number of goods and
commodities in the world.

Main Reasons behind Chinas Slowdown.

This weeks Chinese stock market implosion has been widely viewed as a reaction to the Chinese
governments devaluing the yuan on Aug. 11a move many presume was a frenzied bid to lower export
prices and strengthen the economy.
This interpretation doesnt stand up to scrutiny. First, Chinese investors havent been investing based on how
the economy is doing, but rather, based on what they think the government will do to prop up the market.
The crash, termed Black Monday, was more likely a reaction to the central banks failure over the
weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February
and April had boosted stock prices. The government eventually caved andannounced a cut on Tuesday (Aug.
25).
Second, the crash happened nearly two weeks after the devaluation, and the government only let the yuan
depreciate by about 3% before swooping in and propping up its value againwhich hardly helps exporters
since the currencys value effectively rose some 14% in the last year.
The devaluation probably had more to do with breaking the yuans tightly managed peg to the US dollar, an
obligation that has been draining the economy of scarce liquidity as capital outflows swell.
Both movesthe government pulling back from its market bailout and the currency devaluationstem from
the same ominous problem: Chinas leaders are scrambling to find the money to keep its economy running.
To understand the broader forces that led to this predicament, heres a chart-based explainer tracing its
origins:
China used its exchange rate to stoke growth

China has long pegged its currency to the US dollar at an artificially cheap rate. Keeping the yuan cheaper
than it should be, even as export revenues and foreign investment gushed in, allowed China to amass huge
foreign exchange reserves. A cheap currency has also powered Chinas investment-driven growth model
(more on this here). By paying more yuan than the market would demand for each dollar, the Peoples Bank
of China (PBoC) created extra money out of thin air, sending it sloshing around in the economy.
(Meanwhile, the PBoC prevented this from driving up inflation by setting its bank reserve requirements
unusually high, as we explain here.)

Easy money, easy lending, easy growth. This was especially true after the global financial crisis hit, when
China pumped 4 trillion yuan ($586 billion in 2008 US dollars) into its economy to protect it from the
fallout. The resulting double-digit growth attracted foreign investment and hot money inflows, raising
demand for yuan. To buoy its faltering export industry, the PBoC had to buy even more dollars to prevent
surging yuan demand from driving up the local currencys value.

The government pumped the stock market

But growth is now slowing, making the $28 trillion in debt China racked up in the process even harder to
pay off.

About a year ago, the government turned to pumping up the stock market. The thinking behind this move,
says Derek Scissors, economist at the American Enterprise Institute, was, Hey, why not address our huge
problems by replacing debt with equity? In other words, a bull market would help indebted companies raise
new capital and pay off overdue loans. But eventually the market tanked.

So starting in early July, the government launched a sweeping stock market bailout, vowing to prop up the
Shanghai Composite Index until it hit 4,500. The problem is, every time it has neared that target level,
investors start selling in anticipation that the government will pull back its support. As a result, the Chinese
government has now spent as much as $1 trillion to prop up stocks.

Hot money fled the country

While some investors were betting on stocks, others had seen the writing on the wall and were getting out
swapping their yuan for other currencies. Starting in late 2014, the influx of hot money reversed course, and
speculative investment flooded out of China. One measure of that is the drop in (mostly) short-term trade
finance from foreign banks, which started in Q4 2014:

Another is the fall in foreign exchange that Chinese banks are holding:

Once people started selling the yuan, others began fearing that their yuan holdings would lose valueso
they sold too. Lower demand for the yuan should have lowered the currencys value relative to the dollar.
But the PBoC had to keep the yuans value stable. Not only had it promised to do so as a requirement of
joining the IMFs basket of central bank reserve currencies; the yuans stability and gradual appreciation has
long attracted foreign capital into China, says Carlo Reiter, an analyst at J Capital Research. To continue
propping up the yuans value, the PBoC started selling dollars from its precious reserves in exchange for
yuan:
Buying back yuan lowered liquidity, however, which raised borrowing costs, putting a damper on borrowing
and investment and threatening deflation:

Higher borrowing costs exacerbated the countrys $28 trillion in debt, much of which has been borrowed at
variable interest rates.

The rising stock market crimped bank lending

As investors shifted money from their banking deposits into brokerage accounts to buy stocks, liquidity
tightened, leaving banks with less money to lend, says Christopher Balding, finance professor at Peking
University. To keep the economy growing, the government continued to pressure banks to lend.

To help keep credit flowing, the Chinese government launched a bailout in early July (which, as we
mentioned earlier, cost the government more than $1 trillion.) To fund this bailout, interbank lending by
state-backed entities has surged, says Carlo Reiter, analyst at J Capital Research. In July, government
institutions lent 9.3 trillion yuan to banks, mostly to boost the stock market, he says.

However, the flood of interbank capital eventually caught up with the PBoC. Adding even more money into
the financial system put downward pressure on the yuan.

This brings us to the Aug. 11 currency devaluation, which likely occurred because the yuan became too
expensive to defend, says Reiter. Nevertheless, the exchange rate has leveled off over the last few trading
daysa sign that capital outflow is so great that the central bank has once again resorted to selling dollars
for yuan.
Already, this battle to stabilize the currency has had a significant tightening effect on domestic liquidity
conditions, wrote Wei Yao, economist at Societe Generale, in an Aug. 25 note. In other words, the
governments grand plans to reduce its debt woes while preventing capital from flowing out may have the
perverse effect of causing more of both.

Three Main Reasons Behind Chinas Share Market Meltdown.

For more than a year, the world has watched in stunned disbelief at the performance of China's stock
markets.

Undeterred by conventional valuation methods, they've scaled ever dizzying heights, rising around 130 per
cent in one of the fastest inflating equity market bubbles the world has ever seen.

Now it's unravelling at even greater clip, sliding almost 30 per cent in the past few weeks. Curiously, there
has been an almost total disconnect between the shenanigans in Shenzen and Shanghai and other major
global financial centres.

China's stocks rose quickly. Now they're on the slide. And given they aren't fully plugged into global stock
markets, some analysts have shrugged off the significance of the past month's events.

But China's market meltdown matters. Here's why.

1. Power shift
Beijing is facing the greatest threat to its authority since the Tiananmen Square massacre. For, as much as it
has portrayed itself as a "market economy" or unique derivative thereof, the Communist Party has always
called the shots on the economy.

When it comes to investment, old hands have always operated under the maxim of forget the fundamentals,
look at government policy. What Beijing orders, Beijing gets.

Suddenly, that's all changed. After pumping up the property market and watching it unravel over the past two
years, those commanding the economy last year decided to unshackle the share market, allowing ordinary
Chinese to borrow for stock purchases.

It worked. Despite a cooling economy and anaemic company earnings, stocks began an unprecedented surge
that defied even the most optimistic valuation methods.

Hailed until last month by Xi Jinping and Li Keqiang as an important strategy to encourage investment and
reinvigorate the corporate sector, the tide suddenly has turned.

To Beijing's alarm, however, it has been utterly powerless to stop the rout. Its efforts to halt the slide have
shifted in the past fortnight from mild panic to utter desperation, only serving to highlight how seriously the
situation is being viewed.

It began by cutting interest rates and boosting liquidity. The selling accelerated. Then, on the weekend, it
banned new company listings, organised a $26 billion fighting fund to buy stocks and ordered brokers to
stop selling. That failed as well.

On Tuesday it suspended trading in 1,000 companies. The selling continued as an impotent Beijing was
trampled by an investor stampede for the exits.

More stocks were sidelined this morning. The Shanghai market responded with an 8 per cent plunge.

This is not a good look for the new leadership, future efforts to open the economy or political stability.

2. Economic threat

China has been the engine room of the global economy for a decade, particularly since the global financial
crisis, courtesy of the greatest infrastructure and investment boom the world has ever seen.

That debt-fuelled expansion is petering out. To take its place, it was hoped the growing Chinese middle class
would help transform the nation into a consumer economy much like its developed western counterparts.

For years, borrowing to buy shares was banned. Not any longer. Lifting those shackles resulted in a flood of
new money onto the market.

Around 80 million retail investors now actively trade on the Shanghai and Shenzen markets, small in
comparison to China's population of 1.4 billion.

They are, however, the middle class that Beijing hopes will provide the foundations for the country's
consumer-led economic turnaround.

The damage to the middle class, and those aspiring to climb the socio-economic ladder, could jeopardise
Beijing's growth strategy.

3. Debt

Debt is an unknown quantity in China. Officially, it is all under control with gross government debt coming
in at an inconsequential 15 per cent of gross domestic product smaller even than Australia's.

But debt within the banking system much of which is owned or controlled by the government and within
state owned corporations, makes overall debt calculations difficult.

Then there is the shadow banking system, which has grown exponentially outside the official channels.

According to the McKinsey Institute, when everything is counted, China's debt has risen to an eye-watering
282 per cent of GDP.

The extent of bad loans to municipal councils and to property developers also has analysts concerned.
Officially, bad loans sit at around 2 per cent of total lending. There are fears it is closer to 20 per cent.

Until recently, the Chinese people have been savers rather than borrowers. But the exhortations by Beijing to
plunge into stocks has seen margin loans for shares soar.

Ratings agency Fitch estimates at least $300 billion has been extended by margin lenders.

Of the shares that trade freely those not owned by the state or family dominated companies margin loans
cover about 8.2 per cent. Compare that with the US where margin loans are extended over just 2.5 per cent
of freely available shares.

Why does this matter?

First, losses tend to snowball. A trader who has borrowed to buy shares will be forced either to stump up
extra cash when the market drops or sell the stock. That accentuates falls.

Second, and most important, investors not only end up losing their investments, they end up owing money as
well.

If consumers have no cash, they don't consume. So the grand plan for a consumer-led economy could be
under threat.

What Chinas market crash means for Indias economy

Black Monday hit India hard. Really hard.

The countrys benchmark index, Sensex, saw its biggest-ever intra-day fall in absolute terms, convulsed by
the meltdown in Chinas stock market on Aug. 24.
The bloodbath has somewhat abated, with most equity markets across the world now recovering.
But what does the spectre of a slowdown mean for prime minister Narendra Modi and his plans to
resuscitate Indias economy?

Quartz reached out to a clutch of economists and experts to help gauge the impact of Chinas crisis and the
volatility in global financial markets on India.

Modis opportunity while China is slowing down

A slowdown in the Chinese economy isnt a terrible event when you consider that Modi is trying to attract
manufacturers with his Make in India pitch.
Milan Vaishnav, an associate in the South Asia Program at the Carnegie Endowment for International
Peace:
To some extent, we are already seeing that with big investments from the likes of Foxconn and others.
Among emerging markets, India is still a happy story. That is not an excuse for complacency but the poor
fortunes of Indias peers have provided the Modi government with a useful cushion.
Rajiv Biswas, senior director and Asia-Pacific chief economist at IHS, a consultancy:
If India can continue to pursue economic reforms and boost infrastructure investment, it has the potential to
grow at 7% to 8% per year for a sustained period. Meanwhile, the Chinese economy is transitioning from a
high growth economy to a more mature economy whose potential growth rate is gradually moderating below
7% per year. Therefore, India could well assume the mantle of being the fastest growing BRICS economy
over the medium to long term, which would make it a very attractive destination for investment in new
factories and plants by global multinationals keen to tap the fast-growing Indian consumer market.
Radhika Rao, an economist with DBS Bank:
We havent seen major signs of relocation of companies from China. All this while the talk has been about
inflows. Inflows can come in but there are some issues that need to be settled like regulatory issues, land
allocation, coal supplies among others. Simultaneously the recovery in domestic investments needs to
happen.

Markets

While investors pull out funds parked in China and other emerging economies, India still is an attractive
market. And the fall in the equity markets is temporary.

DBS Banks Rao:

The crash has a short-term focus. The Yuan devaluation will be a short-term pain for the rupee and the equity
markets in India draw a lot of direction from the US markets, so any reaction will be because of what is
happening in the US rather than in China.

The Indian rupee has hit fresh two-year lows against the US dollar, which means imports will be costlier.
Morever, Indian exports have been sliding in the recent months and a slowdown in China wont help. But its
not all doom and gloom.

IHS Biswas said:

India is not as vulnerable to external shocks as many other Asian countries, as exports are a relatively lower
share of total GDP than many east Asian countries such as South Korea, Thailand or Malaysia. Moreover,
India has a more diversified export base, being less reliant on exports of goods than many other Asian
countries due to the large value of Indian service sector exports, notably information technology and
business process outsourcing services.

Reforms by Modi

A substantial part of Modis avowed plan to kick-start the Indian economy was by way of big-bang reforms.
These include the controversial land acquisition bill and the long-awaited goods and services tax (GST),
both of which are still stuck in a limbo.

If the Modi government had managed to get these key reforms off the ground, India would perhaps look a
little more attractive.

Carnegies Vaishnav:

Had the government been more successful on the reform front, investor sentiment certainly would be better.
Whether or not structural reforms would have had such a large, salutary effect on the growth rate or
employment in the short term is more doubtful. To that extent, I do not think the costs of not pushing
reform are evident as yet.
Venkatraman Anantha Nageswaran, co-founder of Aavishkaar Venture Fund and Takshashila Institution:
It is not just about these two (land acquisition bill and GST) reform measures but about making sure that
enough changes are made in labour and other laws such that employment generation begins to happen in a
big way in the country.
IHS Biswas:
The Modi governments plans to pass legislations to introduce a GST and a land acquisition bill have stalled
in the Indian Rajya Sabha (the upper house of parliament) where the Bhartiya Janata Party (BJP) lacks a
majority. While this is delaying the implementation of important economic reforms that would boost Indias
medium term growth outlook, it is unlikely that these bills alone would have had a large impact within just
one year. These are medium to long term legislative reforms that will help to boost Indias long-term
potential growth rate, rather than quick fixes that will boost growth over the short term.

Disinvestment and capital infusion in banks

The biggest losers from the China crisis could be the Modi governments ambitious disinvestment plans, and
the much-needed capital infusion in public sector banks.

Carnegies Vaishnav on the disinvestment target:

Many public sector undertakings (PSUs), especially those involved in resource extraction, were less
attractive to investors in the context of low fuel and mineral prices. If this trend continues, the government
will struggle to achieve its rather ambitious target for this fiscal yeara target the finance minister has
refused to back down from.

DBS Banks Rao:

Indias reform agenda wont go off track due to external shocks. The only market-oriented plans are the
disinvestment and capital infusion in banks. For banks, the capital requirement needs to be fulfilled from the
markets, so this part might get derailed.

Synopsis

The possibility of Greece's exit from eurozone (Grexit) has dominated headlines across the world, with many
analysts saying that the potential event could unleash a contagion that will create turmoil in global financial
markets. But most financial markets, including India's, held on despite the "no" vote in Greece, announced
on Monday. There's increasing realization that the volatility in Chinese markets is a bigger concern because
of huge size of China's economy. China's stock markets have shed nearly $3 trillion in market value in the
last three weeks, which is more than 10 times Greece's gross domestic product of $237 billion in 2014.

Here's your 10-point cheat-sheet to the story:

1) Chinese stock markets fell as much as 8 per cent on Wednesday, days after the government unleashed
additional measures to arrest the slide in equities that threatens to destabilize the world's second-biggest
economy. China's main index - the Shanghai Composite - has crashed around 34 per cent from 5,166 to
3,421 in just three weeks since June 16. Chinese markets, which had topped $10 trillion in market
capitalization for the first time last month, have now shed nearly 1.5 times India's GDP ($2 trillion) in the
last three weeks.

2) The crash in Chinese markets comes on the back of a bull run that saw the benchmark index soar 150 per
cent from July 2014 to mid-June 2015. In 12 months, Chinese stock markets rose enough to create $6.5
trillion of value, according to Bloomberg data. David Woo of Bank of America had termed the rally in
China's markets as the world's largest stock market bubble since the dot-com boom of the 1990s.

3) The rally in Chinese markets had no economic fundamentals as it came in a period that saw China
growing at the slowest pace in 24 years and corporate earnings lagging estimates. The relentless rally drove
valuations to unsustainable levels. According to New York Times, the price-earnings ratio of the Shanghai
composite index soared to nearly 26 by June 2015 as compared to 10 a year ago.

4) The rally in Chinese markets was triggered by easy money as the country's central bank cut interest rates
thrice since November 2014 to kick-start the economy. Easing of rules related to margin trading (investing in
stocks on borrowed money) led to a debt-fueled rally in stock markets.

5) The uniqueness of players in Chinese markets further complicated matters. 85 per cent of trading in China
is done by retail investors, and to take advantage of the spectacular rally, many investors (including
university students, barbers and janitors) took to margin trading. Most of these retail investors bought small
cap stocks and invested in new IPOs (initial public offering). As markets started falling, margin calls were
triggered (happens when shares bought with borrowed money fall below a certain level), forcing many retail
investors to liquidate shares to raise cash, and further depressing markets.

6) The market mayhem has forced many Chinese companies to ask for their shares to be suspended from
trading. 1,300 of the 2,800 companies listed in Shanghai and Shenzhen had filed for a trading halt by
Wednesday. This has further dented sentiments.

7) The Chinese government has reacted to the free fall in stock markets by further cutting interest rates and
relaxing margin trading. On Saturday, it suspended the issuance of new share issues and asked brokerages to
buy at least 120 billion yuan ($19 billion) of stocks (helped by China's state-backed margin finance
company) in a bid to halt the selloff in stock markets.

8) According to The Economist, the crash in Chinese markets could be damaging for the country's
development. "For investors from households to pension funds, a well-functioning stock market is essential
given very low interest rates and the shortage of other ways to earn a decent return. For companies, equity
financing is needed as a viable alternative to bank borrowing to reduce their reliance on debt," the magazine
said.

9) The slump in Chinese markets has also impacted the commodities markets, with prices of copper, coal,
natural gas and iron ore falling to 2015 lows. This is bad news for economies that are dependent on export of
commodities.

10) Despite the selloff, many analysts continue to be optimistic about Chinese markets. Nomura termed the
recent fall in Chinese markets as "much needed consolidation". It expects a rebound in Chinese markets after
the sharp selloff. "We iterate that between now and the interim result season in August is where Chinese
equities may bottom and subsequently rise higher," Wendy Liu, analyst with Nomura, wrote in a report on
Tuesday.