What's really happening in China and how is India placed

The Chinese invented the saying ``May you live in exciting times''. And now their stocks are creating a global contagion that hit Indian shores today morning.

Chinese stocks markets closed 5 percent lower in trade today after a series of government initiated measures failed to stem a growing tide of foreigner-led equity sales in the world's second largest market. Chinese stocks are down more than 30 percent since the start of June on fears of excessive valuations and a possible slowdown in GDP growth. A classic Ripple Effect is happening in China as panicked investors head for the exit in droves. Here is a snapshot:

1. Chinese stocks and some sectors are sitting on a gigantic valuation bubble. Some excitement is getting cooled off late.

2. Chinese equities have the highest margin exposure in the world. This means that investors are buying shares by taking money from banks, brokers. A drop in stock prices prompts banks and brokers to seek the return of margin payments. This in turn feeds more sales of shares.

3. Major institutional players sold Index futures to hedge their long only portfolios. This caused markets to fall further.

4. Chinese authorities declined to allow investors to go short on Indices as a hedging strategy. That prompted these players to sell part of their long only portfolio to book profit. This caused further losses.

5. Retail investors, seeing the losses, on the markets decided to redeem their mutual fund investments. These can only be redeemed via selling stocks in the market. This caused further drop in stock prices.

6. As many as 1,300 companies halted trade in Chinese markets. This led to brokers selling shares of other companies to raise cash to pay of banks and retail investors.

7. More than 700 companies closed 10 percent lower on Chinese equity markets.

8. Major Chinese brokerages have sought government intervention to raise collateral funding for investors. This may help stem the tide. Nearly $41 billion worth of credit lines have been extended to brokers.

(Image credits: Indiatimes)