Bank of China's 1% in HDFC: Should we fuss?

Bank of China's 1% in HDFC: Should we fuss?

It's not surprising then that there has been a hue and cry ever since HDFC announced that People's Bank of China raised its 0.8 pc stake to over 1 pc, requiring a declaration to the stock exchanges

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A state-owned Chinese bank's acquisition of 1 per cent stake in HDFC has raised worries that India's financial institutions are ceding ground to a country whose state-owned institutions may be out to buy up strategic assets in the coronavirus-led crash in the stock markets.

The global anti-China sentiment is particularly strong since the outbreak. Beyond coronavirus endangering lives, in India, the health crisis has resulted in a lockdown that has put an already-slowing economy in peril.


  • HDFC Bank bears the brunt of Bank of China's stake in parent HDFC
  • Indians vent on social media, say will withdraw money, close HDFC Bank accounts
  • Several power, infra players have loans from Chinese banks
  • Chinese giants Alibaba, Tencent have invested in Unicorns such as Paytm, Swiggy, Ola
  • China not among top 10 FDI investors into India

It's not surprising then that there has been a hue and cry ever since HDFC announced that People's Bank of China raised its 0.8 pc stake to over 1 pc, requiring a declaration to the stock exchanges. HDFC is also the promoter of India's largest private bank HDFC Bank.

The bank has been targeted on social media, with many Indians saying they will withdraw their money and close their accounts.

But, can this reaction be justified - should a business deal be looked through the prism of coronavirus?

Let's look at India's existing trade relations with China to get a better sense and see if we can play the devil's advocate.

Chinese banks already exist in India

Chinese banks like Industrial and Commerce Bank of China (ICBC) and Bank of Ceylon have already set up base in India to operate as a foreign bank. The Reserve Bank of India (RBI) allows them to either operate as a branch (which most foreign banks do like Citibank, Standard Chartered, HSBC, Deutsche) or operate as wholly-owned subsidiaries. Surprisingly, a third Chinese bank - Bank of China - sneaked in last year without any controversy to set up a branch in India.

In the past, Indian corporates have taken huge loans from Chinese banks especially players from power and infrastructure sector. Even in the aviation industry, IndiGo signed a $2.6 billion loan deal some years ago with ICBC for buying over two dozen aircraft.

In a free market, there shouldn't be any entry barriers for banks or companies to do commercial business or deals. There is currently a policy-level playing field that allows Chinese banks to operate in India under foreign banking regulations. It will not be wise to close this window.

Alibaba, Tencent own Indian unicorns

Two Chinese internet giant Alibaba and Tencent have invested billions of dollars in Indian startups. These startups are in a range of businesses, including financial services, e-commerce, food delivery, cab aggregator, online education.

They have backed Indian entrepreneurs with much-needed capital. That's why we have unicorns in India like Paytm, Swiggy, Zomato, Bigbasket, Ola, Byjus. The Chinese players are investing despite most of these startups are running in losses. It's, perhaps, unlikely any Indian private equity player or institutional investor or bank have the financial strength, and the will, to back young entrepreneurs so strongly.  

$53 billion trade deficit

India runs a trade deficit of $53 billion with China. This effectively means China is exporting more to India than what India is exporting to China.

There has to be some trade rationale (cheap products, dependence on raw material or innovative products) that India allows such large imports from China, which results in running such a massive trade deficit.

After all, the trade deficit has implications for the current account deficit (CAD) as India gets lesser inflows by FPI and FDI. A higher CAD, in turn, puts pressure on the value of currency against the US dollar.

China not investing in India via FDI

India actually needs more FDI inflows as they are stable (not volatile like equity inflows) in nature. But China doesn't even figure in the top 10 FDI equity inflows into India.

If one analyses the cumulative FDI data of the last two decades, China stands at the 18th position with inflows of Rs 14,846 crore ($ 2.34 billion).

Partly, India is not an attractive destination for Chinese because of the bureaucratic delays and lack of infrastructure. But the fact is that Chinese have an infrastructure to be a low-cost producer for the world.

India's efforts should be to learn from China's journey and replace it as an alternative manufacturing or supply chain destination for the world. India should collaborate with Chinese in the engineering and infrastructure space.

Indian stock market not attractive for Chinese investors

While HDFC stake news is hogging limelight, the Chinese investors are not very active in the listed space as portfolio investors.

They don't even figure in the top 10 countries in the equity and debt market. There are no country-specific guidelines for registering as foreign portfolio investor in India.

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