What To Make Of China Bank’s Stake In HDFC

Sundays are usually quiet days for conspiracy theorists on Twitter. Yesterday, however, something got their animal spirits pumping. News came in that China's central bank, the People's Bank of China (PBoC), had bought a 1 percent stake in HDFC, India's largest housing finance company. It started trending very quickly, with people - including blue-tick accounts - raising concerns that China was trying to take over Indian companies. Some of the more popular tweets alleged that China had first released the 'Wuhan virus' to cripple the global economy, send stock markets into a tailspin, and is now following up by picking up equities dirt cheap.

How much is 1 percent of HDFC? It is about 17.5 million shares, today worth about Rs 2,900 crores. Now, it turns out PBoC already held 0.8 percent, or 13.8 million shares of the company in March 2019. At that time the value of the Chinese central bank's holdings was about Rs.2,700 crore. In the past three months, HDFC's share price has dropped from about Rs.2,500 to Rs.1,500, a 40 percent 'correction' caused by the Coronavirus. PBoC took the opportunity to buy 0.2 percent more.

This investment would have cost it $70-80 million. Put that in the context of the assets PBoC currently holds. Data available for February tells us that China's central bank has about $ 5.2 trillion worth of assets. Till recently, it was the world's single-largest holder of financial assets. Its total holding in HDFC would amount to 0.007 percent of its investments. And the additional amount it has picked up this month accounts for 0.001 percent of its holdings. The bank has so much money that if it wanted, it could have picked up much more from the market.

In any case, as Deepak Parekh, HDFC's chairman has clarified, PBoC has bought the stake on behalf of China's sovereign wealth fund SAFE. Sovereign wealth funds are state-owned investment funds, which take a country's excess cash reserves and invest them in companies and funds across the world to get better returns. Among the earliest active sovereign funds, three stand out - the Government of Singapore, the Abu Dhabi government's Investment Authority and Norway's government pension fund. The interesting thing is that all these three sovereign wealth funds have larger holdings in HDFC than the People's Bank of China. The Singapore government owns 3.3 percent, the Abu Dhabi government owns 1.1 percent and Norway's central bank, Norges Bank, holds another 1.1 percent. Along with these three government institutions, Saudi Arabia's central bank, SAMA, has also bought a 0.7 percent stake in HDFC.

Of course, when China buys equities anywhere in the world, alarm bells start ringing. The world's second-largest economy is rapidly expanding its economic footprint, especially in Africa and South Asia. India has reason to be worried because the dragon is investing heavily in infrastructure projects in our neighbourhood, as part of its Belt and Road Initiative. Pakistan alone will get investments worth $60 billion to build the China-Pakistan Economic Corridor. Sri Lanka has got billions of dollars of Chinese investments since the early 2000s.

China watchers say many of these investments make no economic sense - they are aimed at expanding China's geopolitical influence in the region. One such example is that of the Hambantota port in Sri Lanka which was built with a Chinese loan. When the port was opened in 2010, it began bleeding so much money that the Sri Lankan government couldn't even meet the interest payments on the loan. The Chinese government has now taken over the port, along with 15,000 acres of land around it, on a 99-year lease, effectively owning and controlling a big port just a few 100 kilometres away from India's southern coast. The New York Times called it "one of the most vivid examples of China's ambitious use of loans and aid to gain influence around the world."

But reading this in PBoC's small investment in HDFC is being excessively alarmist. A one percent stake is significant only because India's stock market rules mandate that anytime an investor crosses that threshold, it needs to be reported to the public. It doesn't give PBoC any ability to arm-twist HDFC's management or make it change its lending policies. The Indian government would enter the picture, through its own investment arms, way before any foreign government gets a sizeable chunk of any Indian private financial institution.

In fact, if anything, PBoC increasing its stake in HDFC should be seen as an endorsement of both the company and India's housing market. Clearly, sovereign wealth funds believe that HDFC shares are trading at less than their fair value, which is why they have increased their holdings. They also appear to be betting that India's real estate sector is likely to revive as India comes out of the lockdown.

Perhaps China believes that the Modi government will give a big stimulus to the economy and the RBI will cut interest rates even more, not only to revive consumption demand but also induce India's middle class to begin buying homes again. There's no indication, yet, on whether a stimulus package is coming or not. But investing in equities is always about betting on what is unknown.

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels.)

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