Chinese share market under a trap

The Chinese SSE composite index fell by 6.3 per cent on on August 18,2015 and closed at 3748. Today, SSE composite index dropped by 3.2 per cent in early trades and trading at 3736.69 on intraday basis. The China Securities Finance Corporation also told that it would not intervene further in the market unless there was unusual volatility and systemic risk.

The People’s Bank of China (PBC ), the central bank there set its official guidance rate down nearly 2 per cent to 6.23 yuan per dollar. In second week of August 2015. After China unexpectedly devalued its currency last week, the yuan declined 3 per cent against US dollar.  This  is the largest depreciation in Chinese yuan in the last 20 years. Dollar-denominated borrowing has been on the rise in the Chinese corporate sector. As per the Nomura report, the total Chinese external liabilities amount to roughly USD 1.134 trillion. The liabilities comprising approximately USD 729 billion in international bank loans and about USD 405 billion in bond issuance.

The International Monetary Fund (IMF) proposed in a report current month to put off any move to add the yuan to its benchmark currency basket until after September 2016. The move of IMF gave uncertainty over progress of key financial reforms from the China.

China’s exports tumbled 8.3 per cent in July, hit by weaker demand from Europe, the United States and Japan. Exports to the European Union fell 12.3 per cent in July while those to the United States dropped 1.3 per cent. Demand from Japan, another big trading partner, declined by 13 per cent. Whereas imports decreased by 8.1 per cent, according to the General Administration of Customs of China.

There is uncertainty that the Chinese government is not going to intervene ahead to prevent the fall in the market. The retail investors are worried as over free fall in the stock market and unusual intervention like currency devaluation. This may lead to FII money outflow from the country.

Foreign investors are considering different factors to remain in the Chinese market. International fund managers are re-evaluating their stance towards investing in the market. Earlier these fund managers were positive on Chinese equities.

Emerging markets are decreasing therefore investors are scaling back exposure to emerging market assets as a whole. MSCI Emerging Market has about 43.6 per cent weightage among the top contributor in the index.MSCI Emerging Market Index, has lost over 20 per cent in the past four months bringing it to 845.21.