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China's market clampdown raises concerns for emerging economies

China has implemented new measures to tighten trading restrictions for both domestic and offshore investors, according to people familiar with the matter.China's recent tightening of market restrictions has sparked concerns among global investors, particularly for emerging markets, as analysts weigh the potential repercussions of the regulatory changes. While the move is expected to impact international investment strategies, experts suggest that India may experience only limited immediate effects.Shanghai Composite index has fallen 9% YTD and the Hang Seng index has fallen by more than 21 percent over the last six months, according to information.
The country kicked off efforts after prices dropped to a five-year low on February 3, according to reports. The country's market regulator promised to act to stop these irregular market movements, including preventing short- selling by bad actors and encouraging long-term investments.Reportedly,the China Securities Regulatory Commission,on Monday said it recently discovered multiple cases of stock market manipulation and “malicious short selling.” The regulator vowed to act quickly to stop illegal behavior that hinders stable stock market operations and hurts investors.Officials this week imposed caps on some brokerages’ cross- border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks.Some quantitative hedge funds meanwhile were banned from placing sell orders completely starting Monday, while others were barred from cutting stock positions in their leveraged market-neutral funds. These bets, known as a Direct Market Access strategy, are believed to have amplified the recent selloff in small-cap stocks, say experts.
Weak economic data, simmering geopolitical tensions with the US, a worsening property crisis and an opaque crackdown on the financial sector have all weighed on investor sentiment. Margin calls and forced liquidation faced by shareholders are emerging as key pressure points after the latest pledge of support provided few details.China is trying to stabilize markets after shares sank to a five-year low in chaotic trading on Friday. The latest moves add to the piecemeal steps policymakers have taken as they struggle to end a three-year rout that’s erased some $7 trillion of value and dented confidence in the world’s second-largest economy.
While experts believe that the restrictions will work well for India, with more flows coming into the country.I don't think we should be looking into money going out of China and coming into India because ultimately, as far as most funds are concerned, this is an emerging market allocation. If China doesn't do well then the EM (emerging markets) index doesn't do well and it becomes difficult to justify more investments into EM as a whole,"said Devina Mehra ,cofounder and chairperson of First Global.

(Ira Singh, Asstt Editor, Gandhinagar)

 


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