In my last article "China - Global Growth Engine or Engineering another Collapse" , I discussed the possibility of a slowdown in China in the near future and its negative impact on the Asian equity markets. In this article, I will be discussing how a slowdown in China can benefit India.
The benefit I am talking about is an advantage in terms of economic growth and not the stock markets. The stock markets are largely driven by global sentiments and can fall even when the economy is performing relatively well.
I have discussed below some of the factors that could benefit the Indian economy in case of a China slowdown.
Commodities and China
China is one of the major importers of industrial commodities. It has also been one of the major factors behind the rise in prices of all major industrial commodities. I am not suggesting that China has the power to manipulate commodity prices or the commodity prices solely depend on China's import activities. However, a large part of the demand comes from China and the commodity prices are impacted considerably by the China demand factor.
Therefore, a slowdown in China would impact the import of key industrial commodities. This would be negative for commodity prices to some extent and since speculation is a part of commodity prices, the correction in key industrial commodities could be more meaningful then expected.
How does this benefit India?
A meaningful decline in prices of key industrial commodities and crude oil can alleviate inflation fears. Therefore, the Indian Central Bank might not go aggressive on their rate hike plans.
This will help the Indian corporates who would be hoping that interest rates don't go up significantly.
Also, the major growth driver for the Indian economy is expected to be the infrastructure sector. It is also more of a necessity as lack of infrastructure has resulted in a failure to attract a even higher level of FDI. A decline in growth in China would result in commodity prices remaining in check. This will help the infrastructure sector as industrial commodities such as steel is a key raw material component of infrastructure projects. Low interest rates would also make financing projects relatively easier.
FDI and China
China's foreign direct investment surged 103% in December 2009 to US $12.1 billion. This was the fifth consecutive monthly increase in FDI on a year-on-year basis. In the event of a slowdown in China, the FDI investments would decline to some extent. Companies in such a scenario would be more cautious and wary of overcapacity.
How does this benefit India?
The decline in FDI in China might be an advantage for India as some of these funds would be diverted to other emerging markets where the probability of returns are higher. Moreover, unlike China, India is not at a stage of overcapacity and excesses. The upside growth potential in several sectors is immense. This will attract greater FDI inflows and a more robust growth across sectors.
I would also like to mention here that India is very close to China in terms of percentage growth in GDP. If growth in China deaccelerates, then China would be growing at India's growth pace or lesser. This would make India the fastest growing economy in the world in percentage terms.
Growth and Deficits
Deficits has been a major cause of concern for the Indian Government. Rising commodity prices have further led to the belief that the deficits might not contract so soon. However, if commodity prices (including crude oil prices) ease off then it might help in keeping the deficits in check. At the same time, the Government is coming up with a strong disinvestment plan and this should help in moderating the deficits which in turn would help the country's overall rating.
Improved ratings coupled with strong GDP growth prospects should make India the favoured investment destination in the Asian region. Again, I am not suggesting that China will be totally out of the picture. But on a relative basis, India would stand to gain in the near term.
Stock Market Outlook
In my opinion, if we witness a scenario of slowdown in China, the Asian equity markets will be negatively impacted. Therefore, in my opinion, it is not possible for the Indian markets to remain robust if other Asain markets fall. It is very likely to have a scenario when stock markets go up when the economy is not doing that well and also a scenario where stock markets go down in a robust economy.
My sense is that the Indian stock markets might underperform in the near term with the economy doing relatively well. One has to remember that the markets have discounted a lot of optimism already in its current valuation. Therefore, any further upside from here will come on very positive surprises related to the global or local economy.
Conclusion
As outlined above, India might just benefit from a China slowdown. However, investors need to be cautious about the stock markets. Partial profit booking is not a bad idea. At the same time, one should be in the lookout for good Companies with scalable business models. Investing in such Companies for long term is a good idea at any point of time.
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