The Chinese government is trying hard to stabilize the stock market, but so far to little effect: early on Wednesday the Shanghai Composite dropped another 8% or so, but then drifted higher. As one of the key measures, nearly all the big nonbank financial institutions are called upon to increase their investment in the market.
Our biggest concern is that the progress of structural reform could suffer as the result. Tomorrow, China is expected to report a slow-moving upward trend in CPI, which likely ticked up from 1.2% yoy in May to 1.4% yoy in June on higher food inflation and positive base effects. Meanwhile, we expect Bank of Korea to have ended its easing cycle and hold the policy rate at 1.5%.
The meltdown in the Chinese stock market is already having an impact on other Asian equity markets and FX baskets. However, the Indian rupee has been resilient when compared to its Asian FX peers. The rupee has been more stable compared to the other Asian currencies. That positively reflects that India is mostly driven by domestic cues rather than global factors in comparison with the other Asian markets.
India has been less of an exporter in the global economy which is unlike, for example, Korea, Taiwan, which very exposed to the global economy and global demand and also they are more linked to China economically compared to India. So, the impact that we are seeing price action today is more impact on the North Asian currencies like the Korean won and the Taiwan dollar compared to the rupee.
