China Stimulus: Will It Impact India?

Chinese policymakers have escalated efforts to bolster the economy and stabilise the markets, reflecting concerns about a recovery hindered by a property crisis, deflationary pressures, and weakened consumer confidence. The report examines if these measures will impact the stock market in India 

As of January 23, 2024, India’s market capitalisation reached USD 4.33 trillion, positioning itself as the world’s fourth-largest market by market capitalisation. This achievement surpasses Hong Kong’s market capitalisation, solidifying India’s position just behind the United States, China and Japan in the global equity market. The ascent of India’s equity market is not solely attributed to its positive gains but is equally influenced by Hong Kong’s decline, contributing to India’s rise to the fourthlargest market capitalisation. 

Notably, Indian frontline equity indices have consistently yielded positive returns over the past eight years, contrasting with Hong Kong’s market, which has been on a downward trajectory since its peak in 2021. This trend underscores the significant outperformance of the Indian equity market. The graph clearly shows the distinct outperformance of the Indian equity market against Hong Kong and Chinese equity market.

Despite the overall volatility in emerging markets, India continues to exhibit a positive trend, driven partly by the increasing interest from foreign institutional investors (FIIs). The anticipation is for a substantial inflow of foreign funds into dedicated India-focused funds in the coming months. In the preceding calendar year (2023), FPIs infused ₹171,107 crore (USD 206 billion) into Indian equities, marking a stark contrast to Hong Kong’s outflow exceeding USD 40 billion during the same period. The divergent behaviour of FPIs in the Indian and Chinese equity markets is rooted in the disparate economic performance and policy decisions of the two nations. 

India’s robust economic growth, outpacing its neighbour’s GDP growth, is in sharp contrast with China’s challenges, including a real estate downturn, persistent deflation, and diminished consumer confidence. Consequently, Shanghai stocks plummeted to five-year lows by the end of January 2024. In response, Chinese policymakers have escalated efforts to bolster the economy and stabilise the markets, reflecting concerns about a recovery hindered by a property crisis, deflationary pressures, and weakened consumer confidence. 

Recent measures include providing more long-term cash for banks, implementing stricter rules on share lending for short selling, and expanding developer access to loans. These initiatives underscore the concerted attempts to address the economic challenges faced by China and stabilise its financial markets. Besides, China’s central bank will cut the reserve requirement ratio (RRR) for banks by 50 basis points from February 5, Governor Pan Gongsheng said – the first such cut for the year as policymakers intensify efforts to support a fragile economic recovery 

The move will free up Yuan 1 trillion (USD 139.45 billion) for the market, the central bank chief told a press conference in Beijing. The immediate response to such action was a sharp recovery of 1.8 per cent on the day, while Hong Kong’s benchmark index soared by 3.6 per cent, having endured its most volatile start to the year since 2020 and after plunging to 15-month lows. Even China’s onshore yuan hit 7.1601, the strongest level since January 12 after the announcement. 

Impact on India
The measures taken by the Chinese government and its central bank to boost the Chinese economy may have an impact on India both directly and indirectly. First, we may witness an indirect impact through commodity prices moving up if the Chinese economic situation improves. For the past two decades, the mantra in commodities has largely been that if you build it, China will buy it. That’s still somewhat true, and the world’s biggest importer of natural resources remains a colossus. India being an importer of commodities, a rise in commodity prices will hurt the Indian economy as well as companies. 

The second and direct impact is through foreign inflows. The foreign institutional investors that have helped the Indian equity market to remain one of the best performing equity markets globally may start lowering their flows towards India. It is well known that this smart money gets attracted towards returns and not the other way around. So, if the measures initiated by China start to yield fruits, we may see some of the institutional investors’ flow moving away from the Indian to the Chinese market. This may impact the Indian market’s performance to an extent. 

The following charts show the FIIs inflows into both Indian and Chinese markets, including the Hong Kong market. 

The importance of the FIIs inflows can purely be gauged by the performance of the Asian equity market last month, i.e. January 2024. The Indian equity markets witnessed the highest outflows in Asia in January, with FIIs pulling out USD 2.62 billion from the Indian exchanges. The frontline index such as Sensex was down 0.4 per cent in January. Apart from India, Sri Lanka saw outflows of USD 6 million during the month. However, other Asian countries saw inflows. Japan led with the highest equity inflows of USD 12.28 billion, followed by South Korea and Taiwan with USD 2.23 and USD 1.72 billion, respectively. 

China’s foreign fund flow data is not updated. It was no coincidence that Nikkei 225 was up by 9 per cent while TSEC Taiwan 50 (TSE 50) was up by 2 per cent in the same period. Nonetheless, the South Korean market declined in January. Hence, any improvement in the Chinese economy will definitely lead to some of the funds diverted towards the other markets. What also supports this is attractive valuation. The Hang Seng Index (HSI) boasts a considerably lower price-to-earnings (PE) ratio of 10.58, signifying a more favourable valuation in comparison to the Nifty 100’s higher PE ratio of 23.75. 

Additionally, the HSI offers an appealing dividend yield of 3.97 per cent, surpassing the Nifty 100’s more modest dividend yield of 1.27 per cent. The combination of a lower valuation and a higher dividend yield underscores the investment allure of the Hang Seng Index, providing potential investors with an opportunity for enhanced returns and income in the Chinese equity market.

 

Nonetheless, lower valuation may not alone have the capacity to pull FIIs back into the Chinese equity market. Investors demand growth so as to commit funds, which is still lacking and is not visible now. A similar rescue plan was deployed after a tumble in China’s stock market in 2015. It produced mixed results – even though the government moved quickly and the overall economy was on a stronger footing. Analysts estimate that some USD 6 trillion – the equivalent of over one-quarter of the output of the US economy – has been wiped off the stock markets in China and Hong Kong since early 2021. They have used so many bullets that the credibility of the next bullet is lower 

Announcing a reserve requirement ratio (RRR) cut in advance also suggests that there is no other effective tool available to stem the market rout. While many economists had been expecting a RRR cut at some point this quarter, it’s not clear how much this will move the needle. Several analysts see the latest move as a way to smooth liquidity ahead of the Lunar New Year holiday next month, though any broader impact on the economy may be limited. Most of the other announcements this week have been fairly vague. The state-owned enterprise watchdog vowed to improve the quality of listed state-owned enterprises (SOEs), while the securities regulator said it would “make every effort” to maintain the stable operation of capital markets and calm investors’ nerves 

China’s Stock Market: Opening Up To the World 

China’s journey toward integrating its stock market with the global scene has been nothing short of monumental. Prior to 2001, foreign investors faced strict limitations, but joining the World Trade Organization (WTO) marked a turning point. The qualified foreign institutional investor (QFII) programme offered a glimpse of hope, providing restricted access to select investors. Then, in 2012, things picked up pace. Eager to boost economic development, Chinese authorities began dismantling barriers, gradually allowing more international players to participate in the domestic ‘A-share’ market. This move ignited a growth spurt, propelling China’s markets to become the second-largest globally by 2020. 

The key milestones on this journey included:
2013: Expansion of QFII and Renminbi QFII programmes, followed by MSCI’s review for potential inclusion of A-shares in their Emerging Markets Index.
2014 and 2016: ‘Stock Connect’ programmes linked mainland markets with Hong Kong, opening doors for both institutional and retail investors.
2018: A-shares finally gained entry into the MSCI Emerging Market Index, with their weight gradually increasing over time. 

This integration holds immense significance, not just for China but for the global financial landscape. By opening its doors, China attracted foreign capital, diversified its investor base, and boosted its overall economic development. The journey continues, with further liberalisation efforts underway, paving the way for a more interconnected and robust global financial system 

The recent announcement of a RRR cut by Chinese policymakers, while anticipated by some economists, raises questions about its potential impact. Some analysts view this move as a means to smooth liquidity ahead of the Lunar New Year holiday, with limited expectations of a broader impact on the economy. Other announcements during the same period, such as the state-owned enterprise watchdog’s pledge to improve the quality of listed SOEs and the securities regulator’s commitment to maintaining stable capital markets, contribute to the broader narrative of stabilising measures. 

However, the overarching sentiment suggests that these initiatives, while potentially boosting sentiment and liquidity, may fall short of addressing the core economic and corporate earning challenges facing China. The economic landscape remains marked by persistent issues, including a real estate crisis and deflationary pressures, creating a complex puzzle for policymakers. As the global financial ecosystem continues to navigate these complex dynamics, the recent outflow from the Indian equity market provides an interesting subplot. A deeper analysis reveals that this phenomenon is not merely a reflection of investor sentiments or economic conditions. 

Rather, it is linked to compliance with the Securities and Exchange Board of India’s (SEBI) enhanced disclosure standards. These standards aim to curb manipulation of the minimum public shareholding (MPS) regulations and prevent foreign organisations from indirectly controlling Indian companies through shell companies. Furthermore, the lacklustre performance of HDFC Bank, marked by significant selling by FIIs, has contributed to the recent outflow from the Indian equity market. Despite these challenges, the Indian government’s recent budget instils confidence in the economy. 

The government has artfully balanced growth aspirations and fiscal constraints by prioritising government capital expenditures (capex) within limited fiscal space. This delicate balancing act is a testament to India’s commitment to navigating the challenging economic terrain. Looking ahead, the driving force for market dynamics in both India and China is expected to be earnings growth. This factor is likely to play a pivotal role in attracting foreign inflows and shaping the investment landscape. At the current juncture, we see the Indian economy and corporate performance better than China and hence we do not envision any impact of the recent Chinese moves on the Indian equity market.