Photo: Bloomberg
Photo: Bloomberg

A Lehman moment?

Indian policymakers and investors will have an important issue to figure out: Will a further financial market collapse in China send more money into Indian equities?

Many such predictions in recent years have been off the mark. The country has done well to avoid a financial collapse despite slowing growth as well as a growing debt mountain. Yet, the recent collapse in China’s stock market deserves more attention from a world obsessed with Greece.

The Chinese have offered investors their own version of the infamous Greenspan put—an implicit promise to support equity prices with strategic infusions of liquidity. But the searing experience of 2008 is that such liquidity infusions eventually lose their efficacy unless economic fundamentals improve. Eventually, the Greenspan put could not prevent the financial meltdown that began with the collapse of Lehman Brothers. It made matters worse by encouraging excess risk-taking.

Indian policymakers and investors will have an important issue to figure out: Will a further financial market collapse in China send more money into Indian equities?

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