The Great Fall of China (or Chinese stocks in this case)

In today's newsletter we talk about the selling spree in Chinese markets and the Indian government's clarification to employees of BPCL and Air India.

The Story

So if you haven’t heard already China’s stock market tanked ~8% yesterday. It was the first chance investors had since Jan. 23 to trade, due to the extended Lunar New Year break. And guess what happens? Over $420 Billion wiped out in one single day.

As expected, this rout was a direct consequence of the Coronavirus pandemic wreaking havoc in many parts of mainland China. The premise is simple. Stock markets take their cues from Economic indicators. Except if you are in India. Where the market does its own thing, while the economy does a very different thing. Okay, we are kidding. But back to the main story.

The Chinese economy is unlikely to emerge unscathed from this massive virus outbreak and investors have had 10 days to process this new information and react to it. So as any rational individual would act in such dire circumstances, most Chinese traders sold their stocks and bailed as quickly as they could.

Anyway, once the selling began, Chinese officials did everything in their power to prevent the fall. They pumped in massive amounts of money by buying government securities en masse in the hope that individuals and institutions flush with cash would go out there and buy stocks instead. Unfortunately, that didn't work. They even banned short selling (where people sell stocks by borrowing them from other people in the hope of turning a profit). Didn’t work either. Finally, in one last bid to halt the fall, officials denied major shareholders from selling their stocks for 6 months. But alas, by the end of trading day, it was carnage. More than 3,000 stocks (80% of all Chinese shares) listed on the country’s two major stock exchanges in Shanghai and Shenzhen, saw trading suspended after prices hit a daily limit that caps gains and losses to 10%. And China experienced one of the worst stock market capitulations since 2015.

Don't Fear, Don't Protest

Also, in other news, the government assuages fears of employees at BPCL and Air India about the potential stake sale.

So the government has been talking about selling its stake in BPCL (Bharat Petroleum Corporation Limited) and Air India for a while now. Unfortunately, selling a government-owned entity isn’t quite easy. The most brutal backlash usually comes from the employees. Because when private sector companies take over, they try to weed out inefficiencies by firing staff indiscriminately. One might even contest that these harsh measures are necessary. But no matter how you look at it, this is a potential area of conflict. And with employees taking to the street, selling becomes difficult. If there are political undertones, it becomes even more difficult. So what do you do?

The only thing that you can do is strike a balance. So the government recently noted that there will be certain protective measures incorporated into the share purchase agreement so that when companies do take over, they won’t have a free hand to do as they please. But then this introduces another complexity. If these restrictions are overbearing, companies will be tentative about buying the likes of BPCL and Air India in the first place and considering the government is cash strapped, for now, that can’t be good either.

So despite stating that they will do everything in their power to protect employee interests, it is hard to be completely convinced by this argument. But here’s hoping that they are able to strike a good deal nonetheless.

Also, we’ve received a lot of queries about our piece on the NRI taxation policy yesterday. We must sincerely apologise for getting it wrong. As many have rightly pointed out, the NRI tax law still has many ambiguous bits embedded within it and we aren’t entirely sure what the intricacies are yet. So you will have to bear with us, while we collect more details on this subject. We will return to this story soon.

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