Does India Gain or Lose From China’s Massive Stimulus and Stock Rally?
People's Bank of China, Beijing
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.
