India's bulls relish China inflows

By M H AHSAN
Retail and institutional investors staying bullish on Indian stocks despite recent steep declines are pointing to the first clearance given to a Chinese foreign institutional investor (FII) to invest directly in the Indian markets as one reason for their optimism. Market regulator the Securities Exchange Board of India (SEBI) has given the go-ahead to the Shanghai-based China International Fund Management (CIFM), with US$4 billion available for overseas investment, to buy into Indian stocks.

CIFM is managed by the financial wing of the Shanghai Municipal government and China’s third-biggest investment firm, Shanghai International Trust and Investment Company, along-with US fund giant JP Morgan. It was among the first few fund houses that the Chinese government permitted to invest in international markets following relaxation in overseas investments in June 2007. Last October, CIFM raised more than $15.5 billion from almost two million investors keen to ride the Asian growth story when it launched the first Chinese fund to invest in Asia-Pacific markets (excluding Japan). CIFM has identified Singapore, Hong Kong, South Korea and India as key markets. Chinese authorities have so far allowed overseas investments of $19.5 billion by indigenous Chinese funds.

Media reports suggest that this quota will be raised to $70 billion. Chinese investments in Indian stocks could scale $10 billion, if one also accounts for indirect routes from Hong Kong or global private equity firms, according to predictions that have appeared in some Indian financial papers. Net FII flows into Indian stock markets more than doubled last year to pass $17 billion. SEBI should also permit China Investment Corporation (CIC), with an initial capital corpus of over $200 billion, to pick up Indian stocks, according to reports in India. The Chinese government formed CIC last year to invest in global assets and help to invest the country's rising foreign exchange reserves and counter the impact on them of a falling US dollar.

CIC has bought a $3 billion stake in US-based private equity group Blackstone, whose substantial investments in India include stakes in textile major Gokaldas, Nagarjuna Constructions and the Eenadu group, one of the largest media networks in southern India. In a recent research report on the CIC’s wish list, international securities firm Credit Suisse said it expects Indian software, pharmaceuticals and capital goods businesses to be popular. "It is highly unlikely that CIC could get its hands on India’s resources companies [oil and metals], considering that both countries are competing to acquire resources around the world, and it would be politically too sensitive in India for CIC to invest in Indian resources companies," it stated.

Chinese funds may be kept away from investing in telecom, oil and gas, and port ventures due to Indian fears about security issues. Chinese firms have in the past been prevented from investing in these sectors following decisions by the federal Indian home ministry, but it is not yet clear how the government stands on this issue as it seeks to attract China's giant investment funds. Certainly there appears a developing rapprochement between the two countries regarding mutual investment flows. Beijing has put in place statutes to enable Indian stock exchanges such as the Bombay Stock Exchange (BSE) and the broader National Stock Exchange (NSE) to set up offices in China to attract listings and investments by Chinese firms.

This follows an agreement between SEBI and the China Securities Regulatory Commission in 2006. SEBI has said that new statutes requiring overseas funds to register before investing in local equities are aimed at increasing transparency about the source of funds and improve the market. Bull runThough the benchmark Sensex measure of stocks listed on the Bombay Stock Exchange has fallen steeply to 17,000-18,000 levels in the last couple of weeks from historic highs above 20,000 amid weak global markets, the Federation of Indian Chambers of Commerce and Industry (FICCI) recently said the 30-share index should scale 25,000 within two years. The Sensex surged over 45% last year and hit the 20,000 mark for the first time in October.

The stock market gains will come despite some slowing in gross domestic product (GDP) growth to below 9%, compared with more than 10% growth in the last fiscal year. Finance minister P Chidambaram has underlined that the Indian economy remains robust, with strong real indicators, including a fundamentally good growth of over 8% growth, foreign exchange reserves of more than $200 billion and a fast-growing services sector. This optimism is shared by overseas investors, according to Merrill Lynch, which in a year-end analysis of the Indian economy, said: "Foreign investment in Indian equities is bound to rise. Most global fund managers are taking a longer-term shot on India."

The strength of the market is attracting more companies to list, with 95 companies raising $8.3 billion through initial public offerings last year, ranking India seventh in the world for IPOs, according to data by Ernst & Young. Foreign institutional investors continued to pour money into the country last year, encouraged by rising stock values and also the strengthening rupee. According to SEBI data for the third-fourth week of September, 2007, FII purchases resulted in the quickest ever 1,000-point rise in the Sensex. Net investment crossed $3.5 billion over eight trading sessions.

The strong market helped at least 13 of the country's 200 mutual funds to roughly double their investors' wealth last year, while more than 150 clocked returns of more than 50%, according to the Association of Mutual Funds in India. Total assets under management for the Indian MF industry have risen more than sixfold over the past seven years to more than 5 trillion rupees (US$126 billion).