Dumping of China into India is Good for Indian Equities.

 

Those who are thinking that as Chinese markets are running at a deep discount, and this will lead to a reversal of FPIs from India to China well it might be daydreaming with open eyes.  Why will FPI money come to India in PE, AIF CAT 1 and II, and ETFs? Why are cheap China market investments flowing into India?

China DUMP @ Wealth Firms Crisis & Investment Crisis

There have been several instances where the FPI investors of China are scared and running away from the Chinese market.

·      The China and Hong Kong market shed around $1.5 trillion in January only. Over the past three years, about $6 trillion — equivalent to roughly twice Britain’s annual economic output  has been wiped off the value of Chinese and Hong Kong stocks. In these 3 years when the Chinese markets were running on deep discounts Indian market attracted FPIs.

·      PE investments have declined significantly in China due to the economic and sectoral turmoil. Now this has led to a significant drop in financial product opportunities.

·      It's not the dip which is the opportunity but the lack of opportunity for growth within China.

·      Wealth firm closures are all due to the lack of an ageing population, and the growth of a savings mindset. 30% of residential property purchased in China is parked in real estate which is in the form of investments rather than living.

·      Further around 80% of the savings of China is parked in real estate investments compared to 30% of the U.S

 

·      32.4% is the rate of household savings which comes to 3.2% of the GDP. Further, the current carnage of the real estate investment products leads to more savings and hence wealth products are drying down faster followed by wealth firms shutting down offices.

·      Export has come down and so has the earnings of the Chinese corporates.

·      Chinese consumption accounts for 53% of GDP compared to 73% of the global standard.

·      Hence deep discount opportunities in any market do not lead to an inflow of funds. The Chinese market carnage is so strong that its securities regulator was sacked and moved from his position.

·      U.S. emerging market funds’ allocation to China as a share of total EM exposure declined to 20.6% from 28.6% on an asset-weighted basis, and to 20% from 26% on an equal-weighted basis. They want stability in the economy and an economy to grow based on demographic statistics of the young population. China has a bulging ageing population.

·      The market value of China and Hongkong equities is down by nearly $7 trillion since its peak in 2021 whereas Indian markets rose by 60% and American stocks rose by 14%. Out of its 40 years of export, the Chinese economy faced only 6 times when its trade was negative.

·      A 7% or 8% GDP has now come down to 4% which makes it difficult for its economy to grow.

·      The real estate bubble burst is the new member in the carnage context but what we find is that the Chinese economy struggled from 2017 -18 onwards once Mr. Donald Trump squeezed the neck of Chinese bureaucrats and its economic policy framework.  

·      In China safer money market instruments are attracting the flows instead of equities. Wealth Firms have become bankrupt and legally bound with lost faith due to the real estate wealth products disaster.

·      The fall of the China and Hong Kong markets has led to a significant loss of faith among Chinese investors and further foreign wealth firms are moving out from China.

·      The biggest losers are the blue-coloured job people whose savings went tossed due to the real estate sector collapse.

·      Investment wealth firms like Zhongzhi International a wealth firm owes to 150000 clients around $2.9tn which will never come back. Chinese demography does not support companies for opportunities in PE and similar opportunities.

·      The outflow is very strong from China and the same is proven when it is found that emerging market ex-China debt funds, have attracted inflows for the past seven months and in January drew in $47.3 billion, the most since October 2022 and one of the highest on record.

 

 India Inflow -FPIs

·      The biggest reversal of inflows happening from China to India is through the ETF route. BlackRock is set to fully replicate the underlying index of its $2bn China A-Shares ETF.

·      It has been found that according to data from LSEG Lipper, China-focused funds domiciled outside of that country saw outflows of $1.54 billion in 2023 alone, and an 18.8% drop in assets under management.

·      Meanwhile, the expanding roster of ex-China funds pulled in $6.13 billion in 2023, with assets jumping 168% to $12.27 billion. It has been found that ETF funds excluding China have soared significantly in 2002 and 2023.

·      The MSCI Emerging Markets index returned 9.8% in 2023 versus 20% for the MSCI Emerging Market ex-China index, as the world’s second-largest economy struggled.

·      This is getting reflected in all ETFs and most importantly change of Benchmarks of pension and insurance funds of developed and emerging markets.

·      Zurich-based Vontobel Holding AG is looking ahead towards India to invest and set up an office.

·      India-focused ETFs saw net inflows of $8.6 billion last year compared to the $7.4 billion peak in net flows in 2021.

·      Last year, investors redeemed €2.9 billion (£2.5 billion) from actively managed China equity open-end funds domiciled in Europe, marking an annual organic growth rate of -6.6%.

It's not cheap but the long-term Cheap of China.

Conclusion:

India will attract more inflows in coming years as various benchmarks and ETF inflows Ex China are now getting diverted to India. Indian economic structure is the prime thing which guides the NIFTY and the growth of India.

·      In Dec. 2019, household financial assets were 86.2 % of GDP; liabilities were 33.4 % of GDP. In March 2023, these numbers were 103.1 % and 37.6 %, respectively.

·      Hence  Net Financial Assets of households were 52.8 % of GDP in Dec. 2019, and by March 2023, it had improved to 65.5 % of GDP.

·      The number of GST taxpayers increased from 66 lakhs at its introduction in 2017  to 1.4 crore in 2022, with a larger number of smaller businesses entering the regime.

·      . The number of recognised start-ups has increased from 452 in 2016 to more than 98,000 in 2023.

·      Internet penetration in India, as per the ‘Internet in India’ report 2022, crossed the 50 per cent mark in 2022, growing more than three-fold since 2014. This leads to a significant change in preference for goods and services followed by extensive maturity of investors.

·      Effectively, the capital expenditure of the Public sector (including Union government capex, grants to the states for capital asset creation, and investment resources of the Central PSEs) has increased from ₹5.6 lakh crore in FY15 to ₹18.6 lakh crore in FY24

·      The PLI Scheme, involving an outlay of ₹1.97 lakh crore, 746 applications were approved till the end of December 2023, with 176 MSMEs being direct beneficiaries. The scheme witnessed over ₹1.07 lakh crore of investment, leading to production/sales of ₹8.7 lakh crore and employment generation of over 7 lakh. The scheme has witnessed exports exceeding ₹3.4 lakh crore.

·      The Insolvency and Bankruptcy Board of India (IBBI) shows that the IBC has rescued 808 corporate debtors through resolution plans, with realisations of 168.5%  against the liquidation value and 32% against the admitted claims of the creditors.

·      . Companies are now raising funds from issuances of bonds instead of relying mainly on bank loans. Corporate bond issues in FY23 were 2.9 times those in FY 2014, while outstanding corporate bonds grew a CAGR of 12.8 per cent between FY 2014 and FY23. A report by CRISIL states that the corporate bond market is set to more than double from ₹43 lakh crore in FY24 to ₹100-120 lakh crore in FY30. Hence less burden due to the rising interest rate scenario.

Hence it’s the economic policy framework which protects its own citizens and also FPIs which is the actual reason why India will attract more inflows in coming years compared to the Chinese deep discount market.