-By Ronit Saraogi
INTRODUCTION:
China the largest manufacturing economy has achieved tremendous economic growth, revoked millions out of poverty, and surpassed the United States as the second-largest economy in the world because of its economic reforms, investments in education, and a demographic dividend. It is also now a greater participant in international politics and has more military and diplomatic influence. China's development has had a tremendous effect on the global capital market. China is the second largest economy in the world right now, and it is predicted to develop faster than all other economies combined.
Does China actually matter for the world financial system?
YES, it is. The factors that support are -
• China's surplus of savings over investment;
• China's deeper involvement with global trade;
• China's increased collaboration with global capital markets.
Global risk premiums, exchange rates, and risk-free interest rates could all be impacted by all three factors.
Changes in the international capital market:
• Rising foreign investment in China: With $173.5 billion in FDI inflows projected for 2022, China will overtake all other countries as the world's largest recipient of FDI. Compared to just $15 billion in 1990, which shows a significant increase.
• Chinese investment in foreign countries has increased: $143.4 billion is where China has reached by 2022 in terms of its outbound FDI. In the quarter that starts with June 2023 it has increased by 6.7 USD bn, compared with an increase of 20.5 USD bn in the previous quarter.
According to the IMF, China's share of global GDP increased from 3.0% in 2000 to 18.0% in 2022. The global capital market has been significantly impacted by China's rise.
Specific instances of how China's rise has affected the global capital market:
1) The Shenzhen-Hong Kong Stock Connect program in 2016 and the Shanghai-Hong Kong Stock Connect program in 2014 have made it simpler for foreign investors to access the Chinese stock market.
2) China's stock market has seen an even greater surge in foreign investment since Chinese A-shares were included in the MSCI Emerging Markets Index in 2018.
Positive impacts of the rise of China on the Indian stock market:
With FDI inflows of $8.4 billion in 2021–2022, China was the biggest foreign investor in India at that time. In 2000–01, it was only $787 million; which signifies a drastic increase. The Indian stock market now has greater liquidity as a result of China's rise. This is a result of Chinese investors purchasing more Indian equities. For instance, from $227.7 billion in 2010 to $620.9 billion in 2022, foreign ownership of Indian stocks has rose in which China had one of the major shares.
The impact of China has increased the diversity of the Indian stock market. Chinese stocks now make up a substantial component of the portfolios of Indian investors. This has reduced risk and increased returns for investors, which is one of the main benefits of stock diversification. For example, the MSCI India Index currently includes a sizable proportion of Chinese stocks.
Figures that illustrate the positive impacts of the rise of China on the Indian stock market:
• Chinese FDI in India: $787 million in 2000-01 to $8.4 billion in 2021-22.
• Foreign holdings of Indian stocks: $227.7 billion in 2010 to $620.9 billion in 2022.
• India's share of global GDP: 2.6% in 2000 to 7.0% in 2022.
New financial services and goods, such as the digital yuan and the China International Payment System (CIPS)have also been spurred by China's rise. These technologies are making the Indian stock market more accessible and effective.
Negative impacts:
In the global market, Chinese and Indian businesses are competing more and more in which China has an upper hand. Indian companies may see a decline in sales and profits as a result, and their stock prices may also be affected. The Indian stock market will suffer as a result of the trade disputes between China and the US. This is due to the fact that both countries trade extensively with India, and any disruptions in trade could have a big effect on the Indian economy and its stock exchange market. To understand it below are some examples,
1. The trade disagreements between China and the US may result in a reduced market for Indian products. This is because India trades significantly with both of these countries. A decline may lead to lower sales and profits for Indian businesses, which may have an impact on the stock's value.
2. The US-China trade disagreements could lead to uncertainty and instability in the world economy. Such negative investor sentiment may lead to a decline in stock prices.
Figures that illustrate the negative impacts of the rise of China on the Indian stock market:
• India's trade deficit with China: $69.4 billion in 2021-22
• India's GDP growth rate: 7.0% in 2021-22, down from 8.7% in 2020-21
Remarkably, the adverse effects of China's economic expansion on the Indian stock market are negligible. However, given the rising geopolitical instability in the region, investors should be cautious of them.
Recent happenings:
· China is being surpassed by India in terms of economic growth and stock this year. The MSC China index has decreased 7.6%, while the MSCI India index has increased 7.5%.
· With the backing of billions of dollars in foreign funds and the three times increase in number of retail investors since the pandemic, Indian stocks have outperformed Chinese equities by a significant margin.
· Despite comparatively high valuations, analysts claim that foreign fund managers, who oversee billion-dollar capital flows, are gradually withdrawing money from Chinese stocks and investing a portion of it in Indian equities.
· While Indian stocks saw inflows of about $1.5 billion in August, Chinese stocks saw about $12 billion in outflows from foreign investors. Financial stocks have received an excessive amount of foreign inflows which was a good news.
· The lengthy restructuring process of China's economy will be expected to have hinder growth. It is unlikely that a revival, if it occurs at all, will have a major effect on flows into India.” said by V K Vijayakumar of Geojit Financial Services.
CONCLUSION:
China's economic growth, which saw its GDP share expand from 3.0% in 2000 to 18.0% in 2022, significantly affected global risk premiums and currency rates. As evidenced by the fact that China is currently the top beneficiary of FDI and that Chinese FDI has soared in the Indian stock market, increased foreign investment and liquidity are noteworthy benefits. This increase has also promoted innovation and diversification, since Chinese investors have made large contributions to Indian equities. The growing rivalry between Chinese and Indian enterprises and the repercussions of China-US trade tensions could have negative effects, even though they could just be modest ones. In the face of global tensions, investors should exercise caution and consider the benefits and drawbacks of China's influence on the Indian stock market. Indian companies and investors would have more opportunities as a result of China's expanding economy.
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