📰How Does China's Stimulus Impact India?

Hello. Does India gain or lose from China injecting its economy with its second-largest stimulus package ever? We’ll investigate immediate, short-term, and long-term impacts, and then close with Gupshup, a round-up of the most important headlines.

BTW: Do you know when India developed its first nuclear weapon? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

Does India Gain or Lose From China’s Massive Stimulus and Stock Rally?

Last week, China injected its economy with the second-largest stimulus package in history, larger than the COVID-19 pandemic recovery stimulus, and short of 2008’s $600 billion package. Government leaders indicated more cash was on the way, revealing its leaders are serious about getting China’s growth back on track; markets responded positively, with Chinese equities experiencing their largest single-day surge since 2008. As India and China often compete for allocation in Western emerging market portfolios, a rally in China can have profound implications for India’s markets.

China’s Stimulus Package Explained   China’s chief monetary authority, the People’s Bank of China (PBoC) cut the reserve requirement ratios, a ratio of how much cash banks must keep on hand to their total amount of deposits, by half a percentage point, with another cut signaled for the near future. It also cut the overnight lending rate (equivalent to the U.S. Federal Funds Rate, called the Loan Prime Rate in China) by 0.20 percent. The PBoC will also distribute $142 billion (1 trillion yuan) to commercial banks, and issue $285 billion (2 trillion yuan) in bonds to boost consumption and reduce the debt loads of local governments. Mortgage rates and down payment costs were also reduced.

The PBOC will cut mortgage rates for existing home loans by 0.5 percentage points and lower the minimum down payment for second homes from 25% to 15%. It will also boost funding for commercial banks lending to state-owned firms converting excess housing into affordable units.

Lastly, the PBOC is launching two new tools to support the stock market. Institutional investors can borrow liquid assets like Treasury bonds from the PBOC, using ETFs as collateral to raise cash for equity investments. The central bank will also offer refinancing loans to banks lending to publicly traded companies for share buybacks. These measures complement earlier efforts to restore investor confidence and stabilize stock prices.

Increased Demand for Indian Exports   As China seeks to boost domestic consumption, infrastructure projects, and industrial output, the demand for raw materials and intermediate goods is expected to rise. This is an opportunity for India, especially in sectors such as steel, chemicals, textiles, and automotive components. Indian exports to China for FY24 totaled $16.67B. Immediately after the stimulus, Indian metal equities such as Tata Steel and JSW Steel saw gains on the expectation of greater imports. 

The reason for the fast gains was the effect a slowing China economy had on the entire world. Overcapacity in China led to the dumping of steel, solar, and other industrial items in other economies. So while India’s exports were nearly $17B, imports were actually $101.75B due to dumping. The issue for global economies was so bad that the US chided Beijing for steering state funds into sputtering industries to damage local companies; India, at the WTO in July, said it hoped that China would support the southeast Asian diaspora more by ending their practice. 

India’s Steel Minister H.D. Kumaraswamy relayed that tariffs were necessary due to the suffering caused by cheaper imports. Prices for steel and aluminum have fallen around 12% but tariffs have been raised in lockstep from 12-30%. 

Short-Term Pains   India has been a key piece of the “China Plus One” strategy for companies to diversify from China for geopolitical reasons. Foreign direct investment also rose due to China’s struggling economy post-COVID. If China’s economy regains status as the fastest-growing emerging market, India will need to compete much more vigorously to keep its foreign direct investment and multinational interests.

Chinese stock indices have risen 25% while India has fallen 2% in the same time span. Chinese sentiment will certainly weigh on India for the remainder of 2024 and 2025 though macro strategists at JP Morgan, INVESCO, and DBS Group don’t see a full reversal of the gains that India has made with foreign investors. 

Medium-Term Gains   China’s stimulus could indirectly benefit India in the medium term. A more robust Chinese economy often results in stronger global demand for goods and services, boosting economic activity worldwide. Additionally, global investor confidence tends to rise when China, the world’s second-largest economy, stabilizes, leading to higher capital inflows in emerging markets, including India. With global funds often treating emerging markets as a collective investment category, an uptick in China could spill over into Indian assets, enhancing returns for investors.

Macro

• An independent panel for the RBI is thinking of changes to MIBOR (​​BBG). MIBOR is the overnight lending rate. The panel found that the rate is being calculated on a low volume of transactions since it is only one hour per day which should be increased to three. 

• Expect a full-blown MidEast conflict to threaten Indian oil security (Economic Times). The fight would disrupt the Strait of Hormuz leading to inflation and economic instability. India still relies heavily on the Middle East even with growing Russian oil stockpiles.

Equities

• Domestic investors, with fewer SEBI restrictions, are increasingly becoming equity investors rather than relying on fixed income (Economic Times). Mutual funds and discretionary investing have led to higher returns amid the digital and financial transformation, plus more lax rules from regulators. 

• Adani’s Dharavi project was boosted by state land approvals (BBG). Dharavi is one of Mumbai’s largest slums which will be acquired from the central government and leased back to Mumbai as they develop it. The Dharavi Project is 80% owned by Adani.

Alts

• India is expected to become a $1T digital economy by 2028 (Economic Times). Government initiatives and technological advancements, like UPI and 5G, are enhancing financial inclusion, particularly in healthcare and education leading to compounding growth. 

• Blackrock is hunting for private credit deals (BBG). Blackrock is looking for increased direct lending deals in an array of sectors from hospitality to agriculture. The booming credit market features tightening spreads leading to more borrowers than ever. 

• Anil Ambani and Reliance plan to build Bhutan’s largest solar plant (Economic Times). Reliance wants to develop 1,270 megawatts of hydro and solar energy generating plants. 

Policy

• Leaders in both Congress and BJP are gunning for the Haryana Chief Minister role (Economic Times). A variety of candidates from coalitions in each group are vying for control before assembly polls come out next week. The incumbent is BJP’s Nayab Saini. 

• Jan Suraaj Party’s Prashant Kishore argues that PM Modi has been transferring national wealth to Gujurat (Economic Times). Kishore argued that people needed to vote for better national outcomes while also calling attention to BJP blunders in Bihar.

Oh, and India was the sixth country in the world to develop a nuclear weapon. Called the Smiling Buddha, India completed a successful nuclear test in 1974.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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