Can a gloomy Chinese market outlook spur foreign investor interest in India?

The public debt of the world’s second-largest economy has been mounting, its property market is in deep distress, its exports are slowing and it has to deal with geopolitical issues too. China’s economic outlook is bleak.

Shanghai Composite Index is flat for the year and with the worsening economic situation, there is very little scope for its rise this year.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out that the Shanghai Composite Index is the worst-performing large market if we take the near-term and the long-term views.

“The index is flat not only for the year but for the last 16-year period also. Shanghai composite is now at 3,126, the same level as in March 2007. This is terrible long-term performance,” said Vijayakumar.

He said the disappointment with China is only increasing and this could perhaps be good for India.

Is China’s pain India’s gain?

Vijayakumar underscored that with a declining population, a decelerating economy, political tensions with the West and anti-business economic policies, the prospects of the Chinese market look dim. That’s why FPIs are following an ‘avoid China’ policy.

“This is certainly good for India,” said Vijayakumar.

“Increasing outflows from China and inflows into India are clear inevitable long-term trends. But in the short run, high valuations in India and rising bond yields in the US will pose challenges to this trend,” said Vijayakumar.

On similar lines, Manish Chowdhury, Head of Research at StoxBox underscored that the outlook for China is bleak as it is struggling on multiple fronts.

“China is struggling on multiple fronts such as property market slump, a double whammy of slowing economic growth and looming threat of prolonged deflationary pressure, slowing exports due to hardened stance of the western world to de-risk their supply chains, high-leverage in the banking system and weak domestic demand,” Chowdhury observed.

From India’s perspective, Chowdhury believes that there are two broad factors which would work in favour and assist in FPI inflows to India vis-à-vis China.

“Firstly, in the longer term, nominal GDP growth of 12 per cent looks doable for India and should be reflected in stock market performance. This is likely to be driven by India’s strong consumption story, rich demographic dividend, healthy balance sheet of corporates and a proactive policy stance at the fiscal and monetary levels,” said Chowdhury.

“Secondly, the groundwork for attracting long-term investments is on its way at a rapid pace through various measures such as establishing a strong manufacturing eco-system, undertaking reformist structural measures for the economy, improving ease of doing business, and ensuring stable and predictable governance,” said Chowdhury.

Chowdhury believes that there is a lot of runway for attracting foreign inflows to India going forward, especially considering its strong corporate earnings visibility compared to other emerging economies.

Shrey Jain, Founder and CEO of SAS Online underscored even though August data indicated some stability in manufacturing and related investments, there is no denying that the ongoing decline in property investment remains a significant drag on Chinese economic growth.

Measures like cutting the reserve requirement ratio (RRR) last week sent an interesting signal that there is a sense of urgency to boost growth. Jain said this is not still enough and Beijing may have to introduce more aggressive property easing measures to deliver a real recovery.

“Negative news, low sentiment, and ongoing geopolitical uncertainties are still causing foreign investors to hold back from investing in China. In a recent development at the G-20 summit, an announcement regarding the India-Middle East-Europe Economic Corridor (IMEC) has garnered significant attention. This initiative is being perceived as India’s response to China’s Belt and Road Initiative (BRI) and is expected to enhance foreign portfolio investor (FPI) confidence in the Indian market, potentially encouraging long-term investments,” said Jain.

The world’s second-largest economy has been under severe debt pressure due to huge amounts of investments in infrastructure and a downturn in the property market.

As Manoj Dalmia of Proficient Equities pointed out, about 70 per cent of household wealth in China is aligned towards property. Along with this weak demand, unemployed youth will pose a challenge for sustainable growth.

China’s growth forecast ranges between 4.5 per cent to 5.5 per cent. Dalmia expects further downgrades in analyst ratings for China as the recent policy stimulus from Beijing could not stabilise the economy. He said more measures are required in the property sector as it contributes to about a quarter of the economy.

Dalmia said India has been gaining an upper hand in the last few years compared to other economies considering its good relations with different nations.

“The G20 held recently has given a further boost to all the ties several inflows are to come in semiconductors, new-gen technologies, and infrastructure as it is the fastest growing emerging economy worldwide making it a lucrative investment avenue. This sentiment can pull in FPI inflow in India not only from China but other countries as well,” said Dalmia.

Abhishek Jain, Head of Research at Arihant Capital said while regulatory issues and geopolitical tensions have contributed to investor apprehension, leading some to shy away from the Chinese market, specific sectors show potential and may be attractive to investors.

Jain said the situation in China might prompt global investors to explore alternatives like Hong Kong or select US companies. This could lead to a shift in allocation from China to these regions. It remains to be seen how this might affect FPI flows and whether it can drive investment inflows into India.

As far as the Indian market is concerned, it has been performing well but upcoming elections are an element of risk.

“Overall, monitoring the dynamics of both the Chinese and Indian markets is crucial, considering the global investment landscape and the evolving geopolitical and economic factors,” said Jain.

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Updated: 18 Sep 2023, 05:23 PM IST