In the age of interconnected (one village) global economy, impact on any major component has its reverberations across the system. China, for two reasons is important – first, it’s the major manufacturing back end for the rest of the world, second, it represents a huge customer base with expanding consumerism and exponentially increasing footprint for assimilating the products and services of the evolving economy and growing product spectrum feeding consumerism. More so, China is moving from a market governed to a market aligned economy. All these forces are acting simultaneously in providing a market correction that was booming for the last 10 years.
Let’s examine these factors and their inter relatedness with the global economy. Also, let’s examine the implications specifically for US and Indian economy.
China, as a country, is moving from managed economy to a market aligned economy. Current economic events are a reflection of several years of that managed phenomenon. Second, with a shift towards market determined and aligned activities, there is bound to be a shift towards increased consumer spending and resulting delta of account deficit. Key issue here is the central intervention to control the market dominated events.
Chinese economy is not as bad as the Chinese stock market sentiments. Stocks and futures are significantly affected by market sentiments. Though market sentiments predominantly determine the perception, several years of analysis has shown that market sentiments are out of sync with ground realities. It will settle eventually but we need to understand, trillions of dollars are lost in such market correction due to partially unsubstantiated sentiments. That will bounce eventually but not wholesome. That residual loss is the real loss for investors. That has set a somber mood on the stock market across the G20.