A Re-balancing China is Good for India

China’s Flash Manufacturing PMI numbers for January came out yesterday and sent markets tumbling across Asia and America. The Dow ended down -1.07%, S&P -0.89%, European markets down about -1%. The Nikkei has opened down -1.45%.

china manufacturing pmi

china pmi

Knee-jerk reactions aside, the PMI print is exactly what a re-balancing Chinese economy would produce. One of the items in their third plenum reform plan was to transition to an economy less dependent on massive government investment and more driven by consumption, innovation and market forces.

As far as the India story goes, China is the biggest consumer of commodities in the world. Its hunger for raw materials put into motion the “commodity super-cycle.” Until China came into the picture, commodities, as an asset class, was out of favor. The prices of most commodities are capped by the price at which a suitable substitute is available. For example, when aluminium prices shot up, aircraft and car manufacturers responded by switching to carbon-fiber. It was Chinese demand that put commodity prices into a different orbit.

As commodity prices correct, the pressure on the Indian current account will ease. This, combined with the recovering US and European economies will prove to be a tail-wind for the Indian services sector.

eurozone pmi

Irrespective of where the market opens today, in the long-term, a Chinese economy that is less reliant on investment driven growth is a net positive to India.

 

Source: Markit

 

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