China’s pain, India’s gain

Chinas move to devalue the yuan by 2 per cent to support its export-driven economy has stoked concern amongst investors on the state of its economy. Since this announcement, yuan has fallen in excess of 3.2 per cent. Inves­tors fear this could be the beginning of a long­term depreciating trend, which could create a spiral effect in other emerging market (EM) curren­cies. The Chinese slowdown is likely to have reper­cussions across the globe, resulting in exodus of funds from a riskier asset class to a safer asset class.

Chinese economy is slowing down. The Chinas manufacturing PMI came in at 47.1 in August, con­tracting at the fastest pace in more than six years.

Stock markets across the globe have corrected sharply. Commodity prices are on a downward spiral. Crude oil has fallen to a six-and-a-half year low. Currencies across the EMs are weakening due to ongoing risk-off trades happening globally.

The fall is more dramatic for emerging economies dependent on commodities.

Since the end of 2014, China has been loosening its monetary policy to revive its slowing economy. But the liquidity generated through loosening has made way into Chinese stocks instead of going into real economy, creating bubbles in the Chinese stock markets. The Shanghai Composite Index had gained 108 per cent between 1 November 2014 and 15 June 2015, despite slowing economy. Regulators had Hang Seng to take urgent steps to restrict inflow of Taiwan Weighted hot money into its stock markets.                                                                               KOSPI

Investors fear the Chinese slowdown BOVESPA could be more severe than what is durm910_2S August reflected by government data. Chinese markets have fallen 43 per cent between 12 June and 25 August and by over 24 per cent since China devalued its currency on 10th August. Even after this correction, the Shenzen Composite Index is still quoting at a P/E of over 40 times (see table).

The exodus of foreign investors from Chinese markets is an opportunity for India to attract foreign investments. The Indian economy is on the mend and the government is determined to resolve structural issues. Earnings of companies are likely to pick up going forward. The fall in global commodities has improved Indias fiscal position and has lowered inflation. This has helped companies improve gross margins as is reflected in the June 2015 quarter results. Fundamentals of India are much stronger than most EM peers.

China is undergoing a difficult transition phase wiljr a slowing economy and high fiscal deficit. Strong multi-decadal growth funded through excessive bank credit has created bubbles in various asset classes. China lags far behind India in the robustness of its banking sector. Chinas domestic credit to private sector stood at 141 per cent of GDP, as against 51 per cent in India in 2014. As China slows down, there is a risk of rising NPAs, which will put pressure on the already fragile banking sector. This could have systemic repercussions on their economy. Indias banking system is extremely robust under rbis vigil.

As the economy slows, foreign companies with a presence in China are looking for alterna­tive investment avenues as a part of their de-risk- ing strategy. This will attract more FDI to India. The government of India is actively working to improve the investment climate in the country. India, which ranks 142nd out of 189 countries on the Ease of doing business scale, now aims to be among the top 30 on this list.

DIPP has released a framework to assess and rank states in terms of ease of doing business to encourage competition among states. The government wants to improve transparency by promoting digitalisation and cutting red-tapism. For instance, the MSME has recently replaced a 20-page long registration form with just a one-page Udyog Aadhar form.

The government is closely monitoring ongoing turbulence in the global markets. Over the past eighteen months the RBI has accumulated huge Forex reserves to face any eventualities arising from global factors. Indias Forex reserves as of 14 August stood at $354 billion, as compared to $292 billion in January 2014. The RBI is ready to intervene in the Forex markets to curb volatility as and when required. $/? closed at two-year low of 66.28, after hitting an intraday low of 67.06 on 25 August 2015.

Indian markets have fared much bet­ter than other EMs in the recent correction. The rupee has remained fairly resilient and has been one of the best performing curren­cies among EMs over last one year, booking at Indias fundamentals, once the clouds of global uncertainty disperse, India will rebound from the steep correction and come out stronger. Chinas pain could turn out to be Indias gain. ♦

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