The China crisis continues in 2016, and that has been roiling the global markets. In an interview to Bloomberg TV India, Mirae Asset Global Investment’s Co-Chief Investment Officer Rahul Chadha gives his perspective of the China share market meltdown and its impact on India and other emerging markets.

How are you viewing the latest trends in the Chinese market?

Clearly, what has happened is that the renminbi depreciation has taken people by surprise. It came on the back of the fact that a couple of weeks ago what we heard from the authorities was that they were looking to keep the currencies stable. We still maintain growth rates are much slower than the official number which is put out. There is very little likelihood of hard landing in China but the sectors which are linked with the “bad” China, which is the fixed investment part of the cycle like commodities, will go through a pain. So I think that is really the whole scenario. In a deflationary environment markets would take a break. The first half, we believe, would be challenging for markets but that would create good opportunities for a market like India, particularly.

In September we saw a similar situation of Chinese market taking a knock like this…there were lots of reports that have started talking about this being similar to what we have seen to the Asia crisis in 1997 as well. Is that something now playing out or is this a very different situation?

Things are clearly much better than what we saw in the last Asian financial crisis of 1996-97. Even if you look at credit-to-GDP ratio that is much lower.

The trade accounts are much better and there were huge amount of deficits around there. See, what happens is that if you look across Asian markets, particularly countries like Korea and Taiwan, the household debt is very high, which is why growth is not much.

But in China, corporate balance sheets need to deleverage. So it is really a question of deleveraging, demographics impacting and growth recovery. So one has got to be in the right sectors but it is not going to be a situation where tail risk arises. So I think this is where the mood swings that you see about China gives good opportunities for internet companies, for the pharmaceuticals or the telecom companies in China that are trading at three times EBITDA with a good growth.

To add to the point which was being discussed about the Shanghai composite for the Asia market, let us look at the market barely 15 months back, in November 2013. This Asia market was trading at 2,000. And within a period of six months, for no reason, just because of Honk Kong and Shanghai connect, went from 2,000 to 5,000. That 2,000 to 5,000 move was not warranted and even at current level looks expensive and I mean the market can very well correct by 20 per cent over the next 12 months.

So it is not fair to look at the market and then get an assessment of the economy. I mean the (Chinese) economy is clearly slowing. But let’s remember it’s an $11 trillion economy and not a $3-4 trillion economy, and a 3-4 per cent growth would be a good number for an $11 trillion economy. I am sure there would be enough sectors which are doing good growth at 10 per cent growth in this $11 trillion economy.

In terms of the emerging market, how much more pressure do you see going forward in 2016? While India still stands out, what’s your assessment?

Emerging markets are not going to behave like a homogenous pack like what happened over the last 15 years. The reason for the emerging markets moving up together was China’s urbanising. China’s huge demand for commodities which meant in a period of 10 to 15 years it went from being nowhere to be 50-75 per cent of incremental demand for commodities.

Now, as the fixed asset cycle rebalances, it is going to be a downturn for at least next two years. We have seen two years of downturn probably and another two years we can see China take out 100- 200 million tonnes of steel capacity out of the system. A similar thing can happen with aluminium.

Some of this expensive oil producing capacity has to go out of the system. And then probably over the next 12-15 months we can look at the commodity producers. But in the interim, what happens is, in economies like India, specific stocks in consumer, healthcare and retail banks will look interesting.

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