Why China’s stimulus could be a worry for India
China’s policymakers recently introduced stimulus measures aimed at bolstering demand as keeping the world’s second-largest economy grapples with a prolonged property sector debt crisis, continued deflationary pressure and high youth unemployment.
The People’s Bank of China slashed interest rates on one-year loans and eased rules on purchases of second homes. The government also issued cash handouts and floated new subsidies for some jobless graduates, while the Politburo vowed to boost fiscal spending to arrest a decline in property prices. The move will inject around a trillion yuan ($141.7 billion) in long-term liquidity into the financial market, as per central bank chief Pan Gongsheng.
Beijing also plans to issue sovereign bonds worth about 2 trillion yuan ($284 billion) this year, in part to subsidise consumer goods purchases and child support, effectively transferring funds to households.
Emerging market investors, who minted money following the mantra of ‘Buy India, Sell China’ in the last two years, are now beginning to take reverse steps following Beijing’s mega stimulus. After languishing against other emerging market peers, the Chinese stock market has roared back to life with CSI300 jumping 25% in one week and Hang Seng rallying 16%. On the other hand, both Nifty and Sensex have been under selling pressure with FIIs pulling out more than a billion dollars in Monday’s trade when Sensex ended nearly 1,300 points lower.While institutional investors are worried about peak valuation in a retail investor liquidity-led rally on Dalal Street, FIIs now have enough reasons to buy the Chinese resurgence story – large stimulus package, cheap valuation and underweight stance. “India has performed strongly and we are looking at other markets. China and ASEAN could actually outperform. India is actually quite a domestic liquidity market,” Joanne Siew Chin of DBS Group said. The Singaporean financial services firm is of the opinion that India will underperform China for the rest of 2024.Arnab Das, Global Macro Strategist, Invesco, has told ET Now that China is a significantly more affordable market in terms of valuation than India. Historically, India has maintained a high valuation, and this trend appears to be more pronounced. While this disparity may influence market dynamics, it is unlikely to lead to a complete reversal of the capital outflows from China or the inflows into India.
Yet, the Chinese sentiment among global investors is likely to keep weighing down Indian markets.
How a slowed-down China became a problem
The world as well as India have faced challenges from the slowdown in the Chinese economy which has left it with a huge overcapacity which China tries to dump all over the world jeopardising growth in local industries. From electric cars to solar panels to steel, China’s overcapacity has drawn criticism from many countries, leading to trade tensions. The US had chided Beijing for steering state funds into key industries, propping up money-losing companies and flooding world markets with exports that threaten the livelihood of local firms.
India has raised concern over its large trade deficit with China and the non-transparent subsidies and mechanisms followed by the latter, which it said lead to low prices and hurt the local industry. At the World Trade Organization (WTO) Trade Policy Review of China in July, India also said it hoped China would support issues concerning the global south.
In 2023-24, India’s exports to China amounted to $16.65 billion while imports totalled $101.75 billion, leaving a trade deficit of $85.08 billion, higher than $83.19 billion in 2022. China was India’s largest trade partner during the financial year.
Recently, Indian producers of components used in solar panels have sought trade protections against a deluge of imports, including from China and Vietnam, arguing that safeguards against ‘dumping’ are needed to expand domestic capacity. The Solar Ancillary Manufacturers’ Association, an industry lobby group, has written to the government seeking tariff and non-tariff barriers to curb the inflow of cheap solar products. India has already placed steep import tariffs on solar modules and cells to discourage incoming shipments, with additional measures in the pipeline. The protections have aided a nearly five-fold expansion in domestic modules capacity.
Slump in China has also meant low-priced steel being dumped into India. China exporting its surplus steel in global markets has pressurised prices across the world. In India, the prices of hot-rolled coils are down more than 12% since the start of the year.
India’s steelmakers have recently called on the government to double tariffs on steel imports to curb a surge in cheaper steel shipments from China, Reuters reported. India, the world’s second-biggest crude steel producer, became a net importer of the alloy in the fiscal year through March 2024 and the trend has continued into the current year. India’s finished steel imports from China hit a seven-year high during the first five months of FY25, provisional government data reviewed by Reuters showed. India’s overall finished steel imports also reached a six-year high at 3.7 million metric tons in the April-August period of this year. Steel minister H.D. Kumaraswamy this month said Indian steel makers were “suffering” because of cheaper imports.
India will impose tariffs of between 12% and 30% on some steel products imported from China and Vietnam in a bid to safeguard and boost local industry, Reuters reported a few weeks ago. India has initiated an anti-dumping investigation into imports of Cold-Rolled Non-oriented Electrical Steel (CRNO) from China on complaints by South Korean and Taiwanese steel makers. POSCO Maharashtra Steel Pvt Ltd and CSCI Steel Corporation Pvt Ltd had approached the commerce ministry seeking an investigation into CRNO dumping from China.
Last month, India’s trade ministry recommended imposing an anti-dumping duty on aluminium foil imported from China after surging shipments from the neighbouring country captured nearly a third of India’s market share despite ample local production capacity.
India has recently extended anti-subsidy duty on a Chinese chemical used in pesticides for five more years to guard domestic players. Duties on more chemicals are likely in future.
(With inputs from agencies)