Market Performance Vs GDP

I hear from people quite often that if India has to grow by 8-9% in terms of GDP, then the stock markets have to do well. This has to be taken with caution.

Let me draw you attention to China. In the years 2001 to 2005, China has lost 45% while the GDP grew by 7-10%. This is attributed to a reform called Guquanfenzhi which aimed at offloading government owned non tradable shares of government companies into the market. This lead to the fear that that the value of the tradable shares will be undermined by the release of non tradable shares. However, this reform was modified after the initial market collapse. There was a lock in of one year. In addition to it, a maximum conversion of 5% and 10% per year from second year was allowed. Inspite of these modifications, the Chinese markets continued to bleed. (The same reform was brought back in 2006 when the sentiments were high)

When our government talks about divesting 50 PSUs, it has to bear this in mind.