China Is Getting Desperate

China is pulling out all the stops to get it’s economy out of the trenches and by the looks of it, it may very well be working (at least in the short term). I thought it would be a fun thought experiment to trace back all the measures China is taking to get itself out of a slump and what that could consequently mean for India. Here's everything the Chinese central bank announced on Sep 24:

Cutting average interest rates by 50 bps or 0.5%.

Reducing minimum down payments on mortgages of all types of properties to 15%.

Encouraging banks to lend more to investors so they can buy shares by lowering the RRR (reserve requirement ratio) which they plan to further lower, currently freeing up about $142 billion for new lending.

Cutting the seven day reverse repo rate by 0.2 percent to 1.5%, injecting further liquidity into the economy.

Setting up a swap facility to give non bank financial institutions brokers insurance companies mutual funds access to at least $71 billion in funding to buy shares.

Special relending program said to enable commercial banks to provide loans for share buybacks.

Rolling out more investment projects, including $14.2 billion from next year’s central government budget and another $14 billion to be used for key investment projects by the end of this year, an official from NDRC said.

These measures come in addition to the other steps it took previously this year including Selling $138 billion in ultra long term central special sovereign bonds to boost domestic growth in May earlier this year which will run through mid-November. The three tenors including the 20-year 30-year and 50-year bonds.

Safe to say China is pulling out the big guns but I know what you’re thinking, get to the point! how does this affect me??

Here’s how this will impact india in the short term:

Foreign Inflows: Foreign Institutional Investors (FIIs) have begun reallocating funds from Indian markets, to Chinese stocks. Leading to substantial outflows from India, estimated at 37,000 crores from Indian equities so far. The chants of “Buy China, Sell India” seem to be prominent among these emerging markets investors and how could one even blame them when China has the attractive combo of cheap valuations, the most aggressive stimulus since the pandemic and an underweight stance reaching a bottom against the retail investor liquidity led rally in India.

Market Performance: Chinese indices have been experiencing a resurgence in investor confidence with the CSI300 having jumped 25% in one week, Hang Seng rallying 16% and the Shanghai Composite Index skyrocketing 20% over the last month. On the other hand both Nifty and Sensex have been experiencing selling pressure as FIIs continue to reallocate funds, closing lower for consecutive sessions.

Long term investment shifts: Interest in China may attract more emerging market investors toward the region, potentially benefiting India in the midterm.

Sectoral impact: On the upside again, the economic measures taken by the Chinese government is intended to induce increased domestic demand within China which could lead to reduced dumping of Chinese steel here, giving local steel manufacturers pricing power yet again as well as the opportunity to improve profit margins.

Consolidation phase: The stock market here is entering a consolidation phase, posing a high risk of underperforming compared to Asian peers overall this year due to premium valuations which are a result of euphoric sentiment among retail investors who are less price sensitive, a strong macroeconomic backdrop and favorable earnings outlook according to a report from Kotak Institutional Equities.

So in conclusion, we are in for quite the ride in the short term but maybe there’s light at the end of this Chinese tunnel after all!

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