The collapse in Chinese markets has brought into focus a question that Western nations have been grappling with since the 2008 financial crisis: how much stock markets have to do with the real economy. True enough warning signs that Chinese stocks were overheating have been there for months in the market and the scenes of retail investors losing their life savings had started appearing in June itself. But it was not taken seriously till the crisis deepened. Peter Fitzgerald, Aviva Investors’ head of multi-assets investments, said: “There’s a big difference between the Chinese economy and the Chinese stock market. The economy, for example, has been doing well over the past 10 years, while the stock market really hasn’t until recently.”

The Chinese political bosses are in fact busy finding out the reasons for how the market panic spread to the rest of the world, creating a global meltdown. In fact some insiders point to Beijing’s decision to evaluate the yuan in August as a warning that China’s economy was indeed slowing; others suggested disappointing data on manufacturing growth a week later was the trigger.

Incidentally the meeting of the Indian Inc had not taken the initial symptoms seriously. This was precisely the reasons that at the Delhi meeting except for Modi, the participants were not clear about the future prospect of such move. Significantly for past two weeks, Modi and his senior Cabinet colleagues have been engaged in dialogue with bankers and global experts on managing the economy, while dismissing any negative implication of these events on India. If Devendra Pant, chief economist at India Ratings, says, “How much of it is an opportunity for India will depend on whether Indian industry can ramp up production to China’s scale”, Adi Godrej, patriarch of the Godrej conglomerate, called it “a great time for India, especially in manufacturing, to shine”, and noted that the rupee had fallen less than the currencies of most developing economies after the China crisis sent shockwaves through world markets.

It was surprising to witness that instead of being pragmatic, the Indian Inc and political bosses allowed euphoria to dictate. While Arun Jaitley, finance minister, described India as a new engine to power the world economy, the economist Arvind Panagariya, new chief of Niti Aayog, the planning body, said the scope for India to capture export markets from China was “potentially huge”. They never thought of the possibility of China bouncing back. Probably they held the view that China would never be able to come out of the crisis. One of the reasons for euphoria gripping them was India’s economy in the June quarter had grown up by 7 per cent, which was at par with the Chinese growth, but was lower than what India had during earlier. It would be naive to believe that India is overtaking China in terms of growth and is poised to become the world’s fastest expanding large economy.

With the People's Bank of China cutting interest rates a couple of week back, the Chinese authorities have come up with a slew of measures that are apparently meant to bolster sentiments in order to arrest the steep fall of the stock market from its periodical peak on June 12. Some measures like the plan to allow the country's pension fund to invest in equities is of long-term significance to the healthy expansion of the stock market. Other measures like relaxing collateral rules on margin lending and efforts to crack down on stock market manipulation are supposed to deliver immediate results and help arrest the decline.

Both the volatility and the month long index dive in Chinese stock markets have been beyond the wildest imagination of the investors and prompted the country's policy-makers to take immediate and effective measures to pre-empt panic in the stock market. However while doing so, they have been careful not to mislead investors with the impression that the government is out to boost share prices at any cost. The decline is in sharp contrast to a year of spectacular gains that inflated its total value to more than $10 trillion in June, roughly the size of the country's gross domestic product in 2014.

The political leadership held that given the huge size of the Chinese stock market, it is more than obvious that the country's securities watchdog must take action to prevent an overdue market correction from spiraling out of control and causing irremediable damage to not only the stock market but also the real economy. China is trying to boost its stock markets, which have plunged 40 per cent since mid-June on concerns over the country's slowing economy and an unexpected devaluation of the yuan currency in mid-August.

Among a number of measures, authorities have cracked down on the fabrication of trading information. As a step to bolster the economy, the Chinese government has cracked down on some persons allegedly on the plea that they had planned and engineered the crash. Chinese state media has also announced a slew of confessions following investigations into recent stock market gyrations

Xinhua said Wang Xiaolu, a reporter at the respected Caijing business magazine, had confessed to writing about the Chinese stock market 'based on hearsay and his own subjective guesses' that 'inflicted huge losses on the country and investors'. However a day after Xinhua said Wang was being held, Caijing said it had not been given a reason for his detention, adding it would support his actions within the normal course of reporting. It was unclear if Wang had a lawyer.

Xinhua also said Liu Shufan, an official with the China Securities Regulatory Commission (CSRC), had confessed to insider trading, forging official seals and using his position to boost a listed company's share price in return for several million yuan worth of bribes. It was unclear if Liu had been detained or had a lawyer. Xinhua added that Xu Gang, Liu Wei, Fang Qingli and Chen Rongjie, whom it described as senior executives at CITIC Securities, had confessed to insider trading..

The action has already demonstrated the government’s determination to keep the stock markets under control and restore confidence in the government’s bailout measures. The government intends to send a very strong message to the markets that, if anyone wants to be the enemy of the government, they will be punished eventually. The government is also contemplating to bring about some fundamental changes in the functioning of the People’s Bank of China. There is a feeling that PBC failed to intervene to prop up the market over the weekend of August 22-23, as it had done during previous wobbles, that finally unnerved traders.

Lucy O’Carroll, chief economist at Aberdeen Asset Management, said: “The role of China in the world economy is growing, and events have more of an impact than they did 15 years ago.” Markets were learning what China did and how it did it, she said, and China was learning how markets reacted to its actions. “They don’t want to be seen to be reacting to every little twist and turn in the markets.” China has already loosened fiscal policy after the crunch. China’s finance minister, Lou Jiwei, said that the cap on these bonds would be raised from $310bn to $500bn, a form of stimulus. (IPA Service)