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When Fear Feeds on Fear

Rajeev Dubey     April 28, 2020

Fear feeds on fear. There's no greater fear in world economies today than China, as countries grapple with the fallout of the pandemic that originated in the Chinese city of Wuhan. Was coronavirus a bio-weapon? Was it allowed to spread intentionally? Was it meant to destruct the world's biggest economies so that China could gain? Is China taking advantage of the global stock market crash to shore up equity in strategic firms? Those are just some of the questions leaders the world over are struggling to answer.

Most have already made precautionary moves to block any misadventure. Late March, the European Union (EU) was the first to flag to member states that healthcare equipment firms and research establishments may be takeover targets via the FDI route, asking them to set up FDI screening mechanisms. On April 8, Germany tightened rules protecting local firms from unsolicited takeovers by non-EU (read China) investors. France, Italy, and Spain followed with similar rules. So did the UK, Australia, Canada - even the US.

So, when the Chinese government-owned People's Bank of China (PBoC) triggered a notification to stock exchage regulator SEBI for surpassing 1 per cent equity holding in one of India's biggest and most respected housing finance companies, HDFC - which also owns the largest private bank HDFC Bank - it naturally set alarm bells ringing from SEBI, right up to the Ministry of Finance. PBoC already owned 0.8 per cent of HDFC. As HDFC's stock value crashed 32 per cent, it had only acquired an additional 0.2 per cent, a move that would be considered smart, coming from a portfolio investor. But with global moves to block such deals, the seed of suspicion had already been sown.

Since India's stock market crashed a hefty 23.4 per cent since the first coronavirus case was detected in Kerala, listed firms were particularly vulnerable. Was this a precursor to more such moves? Within days of PBoC's acquisition, the Centre moved in swiftly, amending FDI norms that mandate explicit government approval for FDI from contiguous countries. Since the rule already existed for Bangladesh and Pakistan, the aim was at none other than China. SEBI is doing its own groundwork to establish whether foreign portfolio investors such as PBoC also need to be brought under a similar rule.

The Chinese Embassy issued a scathing statement the following day, calling the move discriminatory and violating WTO norms. But India has stood its ground. Yet, this is just the beginning. Regulatory and a possible consumer backlash against Chinese investments, companies and products in India, coupled with the coming face-off to present itself as an alternative to China for manufacturing, will pit the two rivals against each other more often than not.

India is wooing 300-odd foreign firms pursuing production in the country as an alternative to China in sectors such as mobiles, electronics, medical devices, textiles and synthetic fabric. Last September, corporate tax for new manufacturers was slashed to 17 per cent, lower than in any country in South-east Asia.

The next target is reducing the nearly $58-billion trade deficit with China and Hong Kong. The government plans to reduce import dependence on China in sectors such as electrical equipment, active pharma ingredients (drug parks policy has been announced), optical fibre, flat rolled iron, boilers, tiles, sanitary ware, leather, suitcases, paper boards, silk, umbrellas and toys.

In the cover story, Sumant Banerji, Rukmini Rao and Niti Kiran examine what India's move means for Chinese investments, companies and trade.

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