international analysis and commentary

China’s economic slowdown viewed from India


After markets opened on Monday, August 24th, the Shanghai Composite Index accelerated a week-long plummet that was to eventually cost it a quarter of its value. A few hours later, 1,600 points were shaved off the Bombay Stock Exchange’s Sensitive Index, about 3.6% of its value.

Indian Prime Minister, Narendra Modi, called for a meeting of key ministers and officials to discuss the situation, but there was no sense of alarm. Much of the meeting, said the junior Finance Minister Jayant Sinha afterwards, was to explore how best New Delhi could “utilize this opportunity.” The ministers recognized this presented “a unique opportunity for India to further establish itself as a place for doing business – global and domestic.”

The Indian leadership has made few public comments about the Chinese stock market crash or Beijing’s ham-handed interventions. New Delhi has been more interested in figuring out how China’s financial roller-coaster can be used to increase foreign investor interest in India.

India’s Finance Minister, Arun Jaitley, declared that “out of the big emerging market economies, one of the ones best placed to [help keep the world economy growing] is India.” He said Modi “was particularly of the opinion, since the economic fundamentals were sound, that we need to take measures in order to further strengthen the economy.” Jaitley said that this “would ensure that the global crisis could be converted into an opportunity.”

China is still strong
New Delhi does not see China’s stock market brouhaha as undermining the economic fundamentals of the Middle Kingdom. India does not even see China’s stock market meltdown as being on the same scale as the subprime crisis of 2008-09. The latter had a domino effect across the world. The Chinese crisis has only helped underline what New Delhi already believed: the world’s second largest economy is slowing down and this will have a knock-on effect on those economies most closely tied to China. The stock market crash, at best, means that China’s slowdown will be faster and more severe than expected.

“I am not surprised that China is slowing down… the richer you are the slower you grow,” said the Indian government’s chief financial advisor Arvind Subramanian last month. He said the crisis would do little to stop China’s economic rise. Even at 5% growth China would still overtake the United States in GDP terms. He noted that what was happening was also a fallout of Beijing’s attempts to “reshape” the Chinese economy; moving it away from manufacturing to services, from investment to consumption.

This has been a recurring theme in Indian assessments of China’s problems: these are the inevitable coughs that afflict emerging economies when they take strong doses of structural reform. This sympathetic reading is partly driven by India’s own experiences.

Indian economist and former head of the National Council of Applied Economic Research, Suman Bery, writing about the stock market crash and Beijing’s related efforts to devalue the yuan, said, “We should see the recent move in the Chinese yuan for what it is: a belated imitation of the transition that India itself went through in the 1992-93 period, when we moved from a fixed to a managed float.”

India is just coming out of the sort of speculative housing bubble that presaged the even larger bubble created by individual Chinese investing in the stock market. Though the Indian bubble was much smaller, many in India draw a comparison – and the conclusion that China’s stock market problem would pass as they have done in the case of India. “It was a classic case of two back-to-back asset price bubbles, first, housing, then stocks,” said Omkar Goswami, a well-known private consultant and economist, on China’s crisis. “The boat will rock, but won’t overturn.”

Little exposure and some benefits
It helps that India has minimal exposure to the Chinese economic woes. India and Poland were the emerging economies least affected simply because they were among the least intertwined with the Chinese economy.

Though China is the country’s number one trading partner, most of the trade runs in only one direction – against India. New Delhi has long had severe restrictions on Chinese investment, to the point that cumulative Chinese investment in India is less than one billion dollars. The net result: India is only tangentially connected to China’s global supply chains and its firms little affected by demand slumps on the mainland.

“India has little exposure [to China] and represents another deep market, one in which many fund managers feel more comfortable, especially in light of recent volatility,” said Gary Greenberg of Hermes Investment Management to Reuters.

It is not as if India is impervious to what happens in China. After all, China is the world’s second-largest economy. By the second week of September, the Bombay Sensex was 11% lower than it was on August 11 – the day the yuan was devalued and the Chinese stock market was going under for the second time. The rupee lost 4.6% of its value during the same time.

But Indian markets have recovered quickly in previous plunges by Chinese markets. The rupee exchange rate has also stayed within a comfortable band – it actually rose during August’s stock market turmoil. And this despite nothing other than verbal interventions by New Delhi – a contrast to the nearly $ 250 billion spent by Beijing on shoring up the stock market alone.

There have been three broad means by which India has benefited from China’s financial woes.

One has been an accelerating fall in commodity prices. This has been arguably the most important reason that an inflation-prone India has returned to a stable growth pattern this past year. India has experienced double-digit inflation over the past six years. This eroded political stability, led its central bank to jack up interest rates to over 1,000 basis points above the consumer price index, and left a legacy of red ink with both government and corporations.

That has now begun to reverse itself as commodity prices fall – and a China slowdown is at the heart of this decline. Inflation in India has halved this year alone. Foreign exchange reserves are up 13% and the country’s current account deficit has narrowed by over 90%. The central bank has slowly begun easing interest rates.

Debt-laden Indian firms saw their profitability rise to the highest level in a year as inputs costs fell. The power sector and car makers saw operating profit margins rise to between 13 to 16%, their highest since 2012.  Seventy-five percent of India’s imports are oil related. Each one dollar drop in global crude prices shaves one billion dollars of its trade deficit.

The second benefit, and one that the Modi government is keen to promote, is an enhancement of an image of India as a better place to do business. Foreign direct investment flows in India are back to what they were a few years ago and foreign portfolio investors, though occasionally spooked by global developments, and now hold over 15% of the Indian stock market.

This image has even affected Indian investors. When China fears and year-end profit-taking led foreign institutional investors to pull $2.6 billion out of the Indian stock market in August, domestic funds picked up $ 2.3 billion.

Finally, though lost in the larger ebb of institutional investor capital away from emerging markets, is that a small but growing number of funds are moving capital out of China and into India. This is helped by the dire straits of many other emerging economies, notably Brazil, Turkey and Russia. In the initial June-July stock market turmoil in Shanghai, foreign investors bought over $700 million of Indian shares.

“The recent travails in China make India seem like an oasis of calm in terms of volatility,” Jonathan Schiessi of $12-billion Ashburton Investments was quoted as saying at the time. His fund cut its exposure to China by 1% and shifted much of that to India.

When asked, most Indian finance officials are much more worried about the impact of an interest rate increase by the US Federal Reserve or any other evidence of a tightening American monetary policy. The so-called 2013 taper tantrum, when there was a hint that the US central bank might tighten its quantitative easing, saw the rupee fall 9% between July and August 2013 – much more than the damage inflicted by a summer-long China syndrome.