How will China rate cut impact Indian equity market?

Moneycontrol Bureau

Either way, the Chinese central bank’s decision on Sunday to cut reserve requirement ratio of banks by 100 basis points could have implications for other emerging markets, India included. Reserve requirement ratio is the cash that banks in China have to keep with the central bank.

The rate cut was widely expected, given the weakness in China’s economy. But the size of the cut was bigger than was expected, and market experts see this as an admission that the slowdown could be worse feared.

At the moment, experts are divided on whether China offers a sound bargain, given expensive stock valuations and a slowing economy.

Shaun Rein, managing director China Market Research does not see the rate cut stimulating the economy. That is because he feels the ongoing crackdown on corruption, following the one on pollution, is weighing on business sentiment.

"The whole country sort of in lockdown mode, nobody is willing at the government level to approve new projects, procurement department and state owned enterprises are nervous about buying things because they are worried about being fingered as being corrupt," Rein said in an interview to CNBC-TV18.

"People won’t loan out money and people won’t borrow money if they are scared to do business right now," he said.

Brokerage house Barclays said the rate cut did not change its growth and outlook forecast for China. It expects China’s economy to grow 6.8 percent — less than what most economists are forecasting — in 2015, and is of the view that policy measures will keep the slowdown from getting worse.

The Chinese stock market is in the midst of a powerful bull run, having risen nearly 90 percent in the last six months since the government started unveiling a series of stimuli to stop the economy from stalling.

Last week, the market fell after the government tightened margin trading rules and floated a proposal to encourage short selling through borrowed shares.

However, the latest rate cut has helped overcome concerns arising out of those measures.

Brokerage house HSBC feels it is China’s political goal to create wealth effects in its stock market to stimulate innovation and entrepreneurship. This will also help channel liquidity to the real economy to hedge economic downside risk, as well as to facilitate deleveraging by state-owned firms and further reforms, the brokerage feels.

The rally in the Chinese stock market comes at a time when the Indian shares are struggling on concerns over slower-than-expected growth in corporate earnings.

In a recent interview to CNBC-TV18 last week, former Goldman Sachs Asset Management Chairman Jim ‘O’ Neill said he preferred China over India, despite popular view among money managers being the reverse.

Last week, the International Monetary Fund predicted that India’s rate of economic growth will overtake China this financial year.

"I agree with that myself but we got to see evidence whether that is going to be the case," Neill said, adding that China could actually spring a positive surprise.

"If I look at China, there is enormous change going on, as I said I was there for eight days before Easter and travel around and there are incredible things is going on with the growth of the service sector and internet based economy and its the possibility that people might end up being - against the background of very negative expectations being actually positively surprised by what is going on in China in the next six-nine months," he said.

Neill is not the only one bullish on the Chinese economy in the face of growth concerns.

Market guru Marc Faber too feels the problems of the economy are not as severe as they are being made out to be.

"The growth in China is obviously slowing down. But if you look at the U.S., there were 19 recessions during the 19th century, then the Civil War, World War I, the Great Depression, World War II, the Korean War, the Vietnam War, and the country continued to grow," he said in an interview to China Money Network on Friday.

Faber said the China’s economic problems were ‘solvable, and he would not be ‘too worried’ about them even if it meant the society having to suffer some pain in the short term.

And he does not think that China has over invested in infrastructure.

An excerpt from the interview

"In the U.S. during the 19th century, the country constructed lots of canals and railroads. All the canal companies, including the Erie Canal, went bankrupt. About 95% of the railroads had to be refinanced or went bankrupt. But the network facilitated the country's trade and commerce significantly. So China is doing the right thing."