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A look at Chinese central bank’s growing India footprint

Amid widespread discontent over China’s increasingly boorish behaviour, Indo-China relationships have witnessed low point after low point in recent months. But this rising uncertainty has done little to curtail the Chinese central bank’s eagerness to expand its footprint in Indian businesses, data shows.

In the backdrop of an anti-China sentiment festering in Indian markets, GoI has been closely monitoring Chinese investments amid a push for Atmanirbhar Bharat. A new set of rules has made prior government approval mandatory for investments from countries that India shares a land border with — a move expressly aimed at curbing China-style ‘opportunistic takeovers’.

Escalating tensions following the Galwan border conflict saw the Indian government ban a substantial number of Chinese apps including TikTok and WeChat. In early June, Indian railways — the world’s fourth largest railways network — cancelled a project worth Rs 470 crore with a Chinese firm on account of ‘non-performance’.

Amid all this, an unfazed People’s Bank of China (PBOC) has been steadily adding to its India tally. A couple of days ago, the Chinese central bank followed up its March stake buy in HDFC with another fresh purchase — this time in

ICICI Bank

‘s QIP.

Coming just a few months after the HDFC episode that later prompted a tightening of FPI rules, the latest ICICI stake buy seems to have touched a raw nerve with some quarters in India — most notably the Confederation of All India Traders (CAIT), the powerful traders’ body.

CAIT National President BC Bhartia said that the sudden Chinese interest in India’s banking sector raises an alarm for the entire sector, and the Reserve Bank of India being the custodian of India’s banking must now be on high alert to closely monitor this sinister strategy.

It appears to have riled CAIT to such an extent that the traders’ body has requested finance minister Nirmala Sitharaman to direct ICICI Bank and HDFC to return investments made by the PBOC.

“It seems quite clear that China has designed a well-planned strategy to make an intrusion into the Indian Banking sector which is quite well regulated and is very important for the financial health of the country,” said Praveen Khandelwal, Secretary General, CAIT.

“Even though the Government had introduced a mechanism to check the foreign portfolio investments, there is nothing concrete yet from the RBI to restrain and control the funding coming in from China,” he added.

CAIT also criticised the private lenders for allowing PBOC to invest despite Indo-China conflicts.

For the record, the People’s Bank of China on Tuesday bought 0.006 per cent stake in private lender ICICI Bank by investing Rs 15 crore in its Rs 15,000 crore qualified institutional placement.

A few months before that, the Chinese central bank had raised its stake in HDFC to over 1 per cent, raising much hue and cry in India.

HDFC and ICICI Bank are just two of the Indian bluechips that PBOC has put money in. There also are quite a few others. It holds 0.32 per cent stake in Asian Paints and Ambuja Cements respectively, which it further raised to 0.33 per cent in Asian Paints in the June quarter.

At the end of March 2020, the Chinese central bank held shares worth Rs 4,418 crore in HDFC, Asian Paints and Ambuja Cements.

These investments may appear not too big, but one should not forget that “it is part of China’s strategy,” CAIT’s Bhartia warns.

It must be noted here that the central bank of one country holding assets in another is nothing out of the ordinary. According to a Bloomberg report, global central banks hold nearly $1 trillion of equity assets globally. Central banks also had Rs 67,090 crore worth of assets under management (AUM) in Indian equities in June 2020, compared with Rs 64,600 crore a year ago, according to the NSDL.

( Originally published on Aug 19, 2020 )

Explainer-Is China set to cut RRR soon? What are the implications?

The Chinese government on Wednesday pledged to use timely cuts in the amount of cash that banks must hold as reserves to support the slowing economy, raising expectations about an imminent move to ease policy.

Such reductions in the reserve requirement ratio (RRR) will help underpin the economy, especially small firms, the cabinet said, taking investors by surprise as most had bet on a gradual tightening of policy.

All eyes are now on the People’s Bank of China (PBOC), which has been gradually scaling back pandemic-driven stimulus to curb debt risks, while maintaining targeted support for small firms.

An RRR cut would be the first since April 2020 when the economy was jolted by the COVID-19 pandemic.

IS AN RRR CUT COMING?

Likely but not guaranteed.

The PBOC usually follows guidance from the cabinet, which oversees the world’s second-largest economy and charts the fundamental course of China’s policies.

In most cases in the past, the PBOC has followed the cabinet’s calls for RRR cuts, but not every time. For example, there was no policy move after the cabinet flagged a cut in June 2020.

Growth in China’s economy is slowing, probably to 7-8% in April-June from a record 18.3% expansion in the first quarter, which was heavily skewed by the recoil effect from the sharp slump in activity in early 2020. The current slowdown could deepen due to rising commodity prices.

Small firms in downstream industries could bear the brunt of rising raw material prices, as they struggle to pass on increased costs to consumers.

WHEN AND IN WHAT FORM?

Not certain.

Most analysts expect a targeted RRR cut for small banks, given that the cabinet emphasised the need to support small firms, but a cut for all lenders cannot be ruled out.

Analysts at Nomura expect a universal 50-basis point cut in the coming weeks.

Wen Bin, an economist at Mingsheng Bank, expects a cut towards the end of September, if consumer inflation softens in the coming months.

An RRR cut could inject permanent funds into the banking system, enabling banks to expand loan books and lower financing costs. Other policy channels such as the medium-term lending facility (MLF) will pump out short- to medium-term funds.

The PBOC has used MLF loans more frequently in recent years than RRR cuts.

Expected RRR cuts will help to ease liquidity pressure caused by the maturing of over 4 trillion yuan ($617.2 billion)in MLF loans and net government bond issuance totalling 4.5 trillion yuan in the second half of this year.

HOW MUCH ROOM FOR FURTHER CUTS?

There is still room but not as big as before.

The RRR cut in April 2020 marked the tenth such reduction since early 2018, when the PBOC started an easing cycle, which accelerated significantly from early 2020 after the COVID-19 pandemic paralysed economic activity.

In May 2020, the PBOC said the average RRR for Chinese financial institutions had fallen by a total of 520 basis points from early 2018 to 9.4%.

WILL AN RRR CUT CHANGE POLICY COURSE?

The central bank has been trying to cool credit growth to help rein in debt and financial risks, and that fundamental policy may not change.

Chinese leaders have pledged to avoid sharp policy turns as the economic recovery is not yet broad-based and balanced.

The PBOC has kept its benchmark lending rate, the loan prime rate (LPR), unchanged for 14 months.

The economy is widely expected to grow more than 8% this year, against the government’s modest growth target of over 6%, suggesting there is no big pressure to step up easing.

On the fiscal front, local governments are likely to speed up bond issuance to channel more funds into key projects, helping to stimulate growth.

An expected RRR cut, along with efforts to guide market interest rates lower, will likely be a policy fine-tuning operation to soothe downward pressure on the economy.

A former central bank official said earlier this week that Beijing should also guide market interest rates lower to support economic growth and ease funding pressures on local governments.