Ripple Effect of China's Stimulus Push and Its Impact on India

Recent stimulus measures in China have sparked a significant rally in Chinese stocks, marking their biggest single-day surge in 16 years. The People’s Bank of China (PBoC) introduced easing policies and hinted at fiscal support, boosting investor confidence. This rally, led by sectors like real estate and technology, reflects China's shift in economic strategy, impacting global markets, including India. 

On the final trading day of September 2024, Chinese stocks saw their biggest single-day surge in 16 years, with domestic A-shares hitting record-high turnover. Investors flocked to the rally, driven by Beijing's latest stimulus measures. This surge signals a broader transformation in the global financial landscape, reminiscent of China's remarkable market performance in 2008. 

The recent rally was largely fuelled by a significant shift in economic policy. Last week, the People’s Bank of China (PBoC) introduced easing measures, and the Politburo held an unexpected economy-focused meeting—the first of its kind in September in five years. This pivot from a cautious, incremental approach to a more decisive policy response, including hints of Recent stimulus measures in China have sparked a significant rally in Chinese stocks, marking their biggest single-day surge in 16 years. The People’s Bank of China (PBoC) introduced easing policies and hinted at fiscal support, boosting investor confidence. This rally, led by sectors like real estate and technology, reflects China's shift in economic strategy, impacting global markets, including India. fiscal stimulus, has reignited investor confidence. 

Market Performance 

Chinese indices have been on an impressive upward trajectory, with major benchmarks posting their best weekly performances since 2008. The Shanghai Composite Index, often seen as a reflection of the Chinese economy, surged by 12.8 per cent, reaching 3,088 points. The Shenzhen Component Index, which focuses on growth-oriented sectors like technology and innovation, outpaced the broader market with a remarkable 17.8 per cent rise, hitting 9,515 points. Meanwhile, the CSI 300 Index, a key measure for institutional investors, climbed 14.9 per cent to 3,704 points. 

The real estate sector led this rally, posting a 12.8 per cent gain, followed by technology at 10 per cent and consumer goods at 9 per cent. These gains were largely driven by stimulus measures and a rebound in consumer demand. 

Initially, there was scepticism among investors regarding the impact of monetary easing alone, as many were anticipating fiscal measures. However, the Politburo’s signals of potential fiscal support, estimated between 2 to 3 trillion renminbi (though not officially confirmed), have boosted market sentiment. Moreover, announcements of eased property purchasing restrictions in major cities—including lower down payments and mortgage rates—further fueled confidence in the market. 

Here's a timeline of the key announcements: 

September 24, 2024: 

Monetary Stimulus:

• The People's Bank of China (PBoC) announced a 50-basis-point cut in the reserve requirement ratio (RRR), injecting 1 trillion yuan (USD 141.82 billion) into the market.
• The PBoC also reduced the interest rate on seven-day reverse repurchase agreements by 20 basis points.
• Implementation of lower mortgage rates and reduced minimum down payment requirements for home purchases. 

Property Market Support:

• Measures to lower interest rates for existing mortgages and reduce the minimum down payment ratio for second-home buyers were introduced.
• The PBoC announced plans to cover 100 per cent of the principal for loans to local governments for the purchase of unsold homes. 
   

September 25, 2024: 

Additional Stimulus:

• The PBoC announced further measures to support the economy, including a 0.25-0.5 percentage point cut in the RRR before the end of the year.
• The PBoC also signalled potential cuts to the loan prime rate (LPR), a key benchmark for lending rates. 

September 26, 2024: 

Authority in action:

• President Xi Jinping’s huddle of the 24-man Politburo concluded with a promise to strive to achieve the country’s annual economic goals.
• Officials pledged action to make the real estate market “stop declining,” their strongest vow yet to stabilize the crucial sector after new-home prices fell in August at the fastest pace since 2014.

These announcements represent a significant effort by the Chinese government to address the economic challenges facing the country. However, the long-term impact of these measures remains to be seen. 

This development has far-reaching implications, not only for China but also for other emerging markets, particularly India. 

Valuation and Investment Attractiveness
The current price-to-earnings (P/E) ratio of the Shanghai Stock Exchange stands at 12.85 times, below its historical median of 14.65 times. This suggests that Chinese stocks may be undervalued by approximately 31 per cent relative to their fair value, presenting an attractive opportunity for investors seeking growth in a recovering market. 

Foreign Direct Investment (FDI) Trends
One of the reasons for the sorry state of Chinese companies was China's FDI has faced challenges. In the first half of 2024, FDI dropped significantly by 29.1 per cent to USD 69.93 billion, compared to USD 98.7 billion in H1 2023. This decline can be attributed to: 

1. Heightened geopolitical tensions
2. Unpredictable domestic policies
3. Global economic challenges, including inflation and supply chain disruptions 

However, certain sectors continue to attract interest, particularly high-tech manufacturing. The sector-wise breakdown of FDI in China reveals:

• Manufacturing - 26.3 per cent
• Leasing and Business Services - 17.5 per cent
• Scientific Research and Technical Services - 16 per cent
• Information Technology and Software Services - 12.6 per cent
• Wholesale and Retail Trade - 7.7 per cent
• Real Estate - 7.5 per cent
• Finance - 3.6 per cent 
   

The MSCI Emerging Markets Index: A Bridge Between China and India 

The MSCI Emerging Markets Index (EMI) plays a crucial role in shaping capital flows into emerging markets like China and India. As of September 2024:

• China's weight in the MSCI EMI - 21.58 per cent
• India's weight in the MSCI Emerging Markets Investable Market Index (IMI) - 22.27 per cent 
   

Funds tracking the MSCI EMI manage around USD 500 billion in assets, with approximately USD 107.9 billion allocated to Chinese equities. This allocation accounts for roughly 57.1 per cent of total FDI in China for the fiscal year 2023, highlighting the index's significance as a source of foreign capital. 

Impact on Indian Stock Markets
The recent developments in the Chinese market have several implications for Indian stock markets: 

1. Indirect Benefits through MSCI EMI: As global investors increase their allocation to emerging markets, including China, India also stands to benefit due to its significant weight in the index. This can lead to increased capital inflows in Indian markets.

2. Metal Sector Boost: China's USD 114 billion stimulus package and interest rate cuts have had a positive impact on the Indian metal sector:

• The Nifty Metal index rose nearly 3 per cent, with companies like Tata Steel and Vedanta seeing gains of up to 5 per cent.
• Reduced likelihood of metal dumping from China, stabilising prices for Indian producers.
• Anticipated rise in global metal prices due to increased demand from China, benefiting Indian manufacturers. 

Conclusion
China’s massive stimulus package has led to a noticeable shift in investor sentiment, moving from the "Buy India, Sell China" mindset to a more balanced, or even reversed, strategy. Institutional investors, enticed by China's attractive valuations and the promise of economic recovery through stimulus measures, are reallocating funds towards China, believing that Chinese stocks, which are currently undervalued, may outperform other emerging markets, including India, for the rest of 2024. While India’s stock market has been buoyed by retail investor liquidity, some foreign institutional investors (FIIs) are becoming cautious due to India's peak valuations, seeing limited upside potential. However, the impact of FII selling on the Indian market is expected to be minimal, as domestic liquidity is robust enough to absorb any outflows. Furthermore, passive inflows have largely driven FII activity in India, suggesting that any outflow may not be significant. Interestingly, China's stimulus could also benefit India’s metal sector, reducing the risk of Chinese dumping and potentially stabilizing prices. Despite challenges in China’s Foreign Direct Investment (FDI) environment, both China and India remain attractive to global investors due to their prominent roles in emerging market indices. India’s increased weight in the MSCI Index, which now surpasses China’s, offers investors more flexibility to rebalance their portfolios toward China. However, analysts remain sceptical about a major reallocation from India to China by active FIIs. India is well-positioned to benefit from the global trend of diversifying supply chains away from China. The country is building a strong presence in industries like pharmaceuticals, speciality chemicals, and engineering, demonstrating both expertise and scalability to meet global demand. As Western companies continue to diversify their supply chains, India’s growing manufacturing capabilities make it a prime destination for investment.