NEW DELHI: China’s effort to revive its economy via a financial and monetary stimulus package is perceived to have a strong impact on India - positive as well as negative.
While the initial impact is being felt on Dalal Street as the foreign institutional investors (FIIs) are seen “selling India and buying China”, the success of the package might prove to be beneficial for India. Experts feel it may result in flight of higher foreign funds to India via emerging market route, negligible impact on “China + 1” and control of excessive dumping of finished Chinese products.
“The package is a bold set of interventions by the government. It will allay fears among foreign investors who were becoming sceptical about the Chinese government’s ability to make big-bang reforms. The last time they conducted major reforms was in 2008, which ushered China into to a new league of development backed by large foreign investor participation,” said Debopam Chaudhuri, chief economist of Piramal Group.
"I expect the Chinese investment instruments will gradually start to gain some of their lost sheen, starting with its equities followed by real estate,” Chaudhuri added.
As per him, this is piece of good news for India as well. “China serves as a lighthouse to foreign investors searching for emerging market (EM) opportunities. Reduction in uncertainties within China will attract higher capital allocation to EMs, and India with its growth potential can attract a large share of that pie.
FIIs’ share selling
While India may attract higher funds via the EM basket in future, so far the local market, which saw its biggest weekly slump this week in more than two years, has seen an exodus of FIIs.
This week alone, FIIs sold shares worth Rs 40,000 crore in the Indian market as they find the valuation of Chinese stock much more attractive.
V K Vijayakumar, chief investment strategist, Geojit Financial Services, on Saturday said geopolitical tensions in the Middle-East have become a worry for global equity markets. But the markets have, so far, shrugged off these tensions. The US market is resilient with 21 per cent returns year to date.
Even as crude has risen in recent days, there is no sharp spike so far. The situation will change if Israel attacks oil installations in Iran, he added.
“FIIs turned sellers in the Indian market in October…The selling has been triggered by outperformance of Chinese stocks. Hang Seng index shot up by 26% in last one month and this bullishness is expected to continue since valuations of Chinese stocks are very low and the Chinese economy is expected to do well in response to the monetary and fiscal stimulus,” Vijayakumar said.
“If the momentum in Chinese stocks continues, FIIs may continue to sell in India where valuations are elevated. It remains to be seen how long the optimism lasts. FII selling in financials, especially frontline banking stocks have made their valuations attractive. Long-term domestic investors may utilise this opportunity to buy banking stocks.”
Indian metal sector
A few economists argue that the package, aimed at reviving the stressed housing sector in China, will benefit Indian metal companies, especially steel firms given China, which has a problem of overcapacity, has been dumping its metal everywhere.
Local firms have been struggling to compete with cheap Chinese metals, which is having a severe impact on their pricing power and profit margins. A similar phenomenon is being seen in other areas like solar panels and automobiles.
“The stimulus might drive up domestic steel demand in China, which may help reduce pressure of Chinese steel exports flooding global markets. Domestic solar panel manufacturers might find some relief if housing sector improves in China and there is more demand for energy. In some critical areas, China may even raise its imports from India if its economy improve,” said a senior economist at a leading rating agency.
India exported goods worth USD 16.67 billion to China in FY24. Its imports stood at USD 101.75 billion, resulting in a trade deficit of over USD 85 billion. Announced in late September 2024, China’s latest stimulus includes a range of measures to boost economic growth. The People’s Bank of China cut the reserve requirement ratio by 0.5 per cent, releasing about 1 trillion yuan (USD 141.8 billion) in liquidity.
Mortgage rates for loans are being reduced, with 150 million citizens expected to benefit, aimed at stimulating the housing market. China is enhancing support for its financial markets and capital investment. These actions are in line for China to meet its 5 per cent growth target for 2024.