Chinese mkt crash to have impact on economy: Arvind Sanger

Q: What is the sense, do you think the financial reverses the domino effect within China could slow down the Chinese economy itself?

A: China has been running on one particular leg of the stool as the strong one right now. The housing market, the infrastructure spending, the export market have all slowed down and the domestic consumption has been the brightest part of the Chinese story.

The stock market reversal as measured by the indices understates hugely the amount of carnage going on in China because you are seeing some of the government related and private brokers and banks and others trying to prop up the major index heavyweights while more than one third of Chinese shares are suspended from trading because they are sacred of how much they will go down.

So, I think the carnage is much worse than the official index based statistics that you are stating. Therefore the risk that comes about is the risk of a knock on effect on consumer confidence and on consumer spending.

The commodity markets reacting negatively is probably more knee-jerk but the commodity side of the story, China has already been quite slow in terms of housing and infrastructure.

So, it will see some negative effect but a bigger effect would be not just for companies that are Chinese based, focusing on the Chinese consumer but global companies for whom Chinese consumption growth has been an important part of their story. So, that is one of the major risk of those crash in the Chinese market.

Q: So, you do expect or at least the markets do fear that because of the melting of their savings Chinese could consume less and therefore the already slowing Chinese GDP could slow even faster?

A: I don't even pay attention to Chinese GDP so who knows what they are going to print. So, lets us get away from fantasy land and let us talk about real numbers.

From a fantasyland standpoint, I don't know what GDP number they will print and that is really irrelevant for the market. As far as what is going on clearly the economy is going to slow a lot further. If it was growing at 4-5 percent in the real world of what we call real statistics then this thing risks tipping them into virtually no growth or very little growth and that clearly is the risk.

For global economies, China is no longer just a sideshow emerging market, it is now the second largest economy in the world. So, there is going to be some spill-over risk to global growth if China has a meaningful slowdown in its growth rate.

Q: Let me discuss that in that case. We saw that huge crash of 6 six percent across all the metals on the LME. We saw cuts coming into the crude markets as well. Do you think commodities have more to go by way of falls, even the unlisted ones like steel?

A: Actually if you look at what is happening right now as we speak all the commodities have turned up. Oil is green, copper is green, all the other major commodities have turned up but iron ore which is not a liquid traded commodity is still down 10 percent.

So, what you are seeing that in the real market whether it is steel or iron ore you are not seeing as much volatility but you are seeing some real signs of distress and the real economy.

The Chinese overcapacity in steel has existed for a while and it was playing out in slow motion but now it is playing out in fast motion. Iron ore somewhat had a dead cat bounce for a couple of months and that is rolling over.

The Chinese commodity cycle has clearly been on a soft spot and on a slowdown and certainly the slowdown is not going to help and I don't see commodities like the base metals or oil having big crashes from here or China unless the Chinese economy does have much worse outcome than the kind that we are expecting. Which is somewhat of a slowdown but the government pumping more liquidity more intelligently hopefully than what they have done so far.

Because trying to prop up the stock markets on the measure they have done. First trying to cheerlead the bubble and then trying to prop up in the aftermath of the bubble are two major policy errors in the last few months of the Chinese government has taken. Hopefully they will make better use of liquidity in terms of trying to soften the blow on the economy rather than trying to figure out ways to prop up the bubble.

Although the bubble has largely popped but trying to prevent the market from running its course and finding a clearing price because the quicker the market finds a clearing price the sooner we can get some stability in China. Without that obviously for commodities and other markets, the outcome could be much more dramatic. We are not expecting a dramatic collapse in Chinese growth. We are expecting some negative fallout from this.

Q: Most importantly I want to know the impact on India. Is there a big global economic slowdown which will also take India in its stride or do you think Indian markets have fallen enough to discount the Chinese problem and now it will be domestic. Are you buying India at all?

A: I guess China slowdown really is not much of an effect for India from an economic standpoint to the extent that India is very small exporter to China and much more of an importer to China. So there is not much of a trade hit that India takes from China slowdown. To the extent that that makes commodities cheaper that is a positive, not a negative for India. So, overall it is a non issue for India.

India stands on its own and India has its own challenges in terms of its own disappointing economic growth and its own fantasy GDP numbers lately but India's economic growth itself has to show signs of life on its own and cheaper commodity should have helped a lot. Earlier, it hasn't helped so far, so we will have to wait and watch how the Indian economy and how the Indian companies perform over their coming few months and quarters. Obviously the last quarter was a huge disappointment for Indian markets.

Q: So, you are not buying India right now or any part of India?

A: We are opportunistically buying companies, we are not buying the country as a whole because we are not seeing anything macro that is so dramatically different. We are trying to find individual companies where the opportunities present themselves.