How China’s Tech Crackdown Could Play to India’s Gain?
In July 2021, something unfathomable happened. Goldman Sachs, one of the world’s largest investment banks, revealed to have uttered the U-word in conversations with clients when it came to investing in Chinese stocks.
The U stands for “uninvestable”.
This followed repeated instances of Chinese regulatory crackdown on its own companies, particularly tech companies. More and more industries like education, e-commerce, and even cosmetics have fallen under the radar of such crackdowns pulling down investing enthusiasm in the country to an all-time low.
And to top it off, the Evergrande debt crisis and its evaluated percolation into the global markets has reduced China into the touch-me-not avenue of the global economy.
In hindsight, one of the most direct consequences of these developments has been the gradual emergence of India as a sweet spot for investments, especially for those that have veered away from China. There has been a rise in expert commentary on the expected beelining of global capital into Indian markets, especially tech startups, that offer strong growth prospects minus the China-like risk profile.
Is this just a passing phenomenon or are we witnessing the initial stages of an India-centric economic pivot in Asia?
The Great Stall of China
What started with the “chastisement” of Jack Ma two days before the launch of Ant Financial’s IPO eventually trickled into other sectors. Next in line was the removal of the “Chinese Uber” Didi from app stores followed by a crackdown on cryptocurrency, food delivery apps (Meituan) and the music (Tencent) industry.
But the most potent blow to China’s homegrown industry came with the clampdown on online tutorials. Even though the intentions behind the move were cited as necessary regulation and the need to reign in skyrocketing profits by private tutorials, the overnight sanctions came as a setback to many edtech companies which also have listed presence abroad.
At the micro-level, there could be well-motivated reasons to justify these crackdowns — tightening antitrust regulations, ensuring parity in education, protecting Chinese data and so on.
But on a closer look one realises that breaking with tech growth and disincentivising foreign investments are the kind of blowbacks a nation would be willing to accommodate only for perceivably bigger goals like expansion of authority or predominance over tech entities which have a populist appeal.
Regardless of whether China cares about foreign investment coming onto its shores or not, the whip-down on its tech industry has resulted in erosion of close to $1trn of capital. Capital that is now rotating swiftly onto Indian shores due to a number of factors.
Chinese Wind in Indian Sails
Let’s take a numbered approach to the factors through which India is likely to benefit from the investing currents drifting out of China.
First. At the beginning of 2021, more than $65bn in venture capital was estimated to flow into China — far exceeding India. Now, it’s a different picture. By the end of July, the value of venture deals in China shrank to $4.8bn whereas in India it rose to $7.9bn thus overtaking China for the first time since 2013 on a monthly basis.
Second. The ongoing IPO frenzy in India and startup boom have signalled massive opportunity for profit in the Indian markets and are slowly turning the attention of global investors. The stock markets in both countries are also playing along different tunes with index performances going in opposite directions for the better part of a year.
Third. India is the third-largest market for startups in the world. For investors who are inclined to move their kitties out of China but settle for a similar market with strong growth projections, India is an easy switch.
In a way, the Chinese crackdown has given India room to double down on the venture capital and private equity money flowing out of China in this somewhat zero-sum game. For every prominent Chinese stock, there is a potential Indian alternative to re-route investments (Byju’s for New Oriental, Ola for Didi, Zomato for Meituan etc.).
Fourth. In case one might wonder as to why India over other Asian destinations, the answer lies with China itself. Amongst all the Asian markets, Indian stocks have the lowest correlation to China. South Korean equities, for instance, have significant exposure to China on account of shared market synthesis, operation of big companies (like Tencent) and cultural proximity. So do Japan, Vietnam, Taiwan, etc.
Fifth. The size of Indian markets continues to proliferate with an upswing in demographics and new participants. According to SEBI, retail investor accounts in India surged by nearly 34.7% to reach 55 million in FY21 which shows increasing participation in the securities markets boosting capitalisation targets for foreign investors.
Sixth. The sheer size of big and emerging tech frontiers like SaaS (Software-as-a-Service) and their projected growth in India in the coming decades ($1trn valued industry by 2030) indicates the ushering in of an era of immense wealth and job creation. And if there is one thing that venture capitalists of the West are prone to disliking, it is the fear of missing out on a pregnant market this size.
And finally, the “belief system” in India is more reliable and immune to overnight transformation as opposed to China. As much as investors worship money, they worship stability in governance even further which helps add sustained value to their portfolios and risk-free returns.
Riders in the Replacement Strategy
Despite all the seeming advantages, it is still a stretch to believe that investors who lost money on account of the Chinese crackdown will automatically shift exposure to India. For one thing, India still lacks the size and operational dynamic of the Chinese market. The rules on capital convertibility are also strict.
Besides, the Chinese tech sector may be down but not out. It is too big and too powerful for the world to ignore for too long and if analysts are to be believed, it won’t take beyond two years for it to regain its equilibrium.
Plus, China isn’t the only nation to escalate its tirade over Big Tech in recent years. India wishes to protect its domestic industries as well. It has its own data laws and it doesn’t wish for the Amazons and Facebooks of the world to ruin its local businesses either.
Ultimately what India does have is a small window of opportunity within which it can take steps to improve its regulatory systems and draw in more global capital. At the core of this effort lies the ability to assure investors of the credibility in its institutions and transparency in systems as opposed to the insecurity of a totalitarian regime that leaves little room to buffer against retrograde policies.
But with global ranks of 40/88 in the Transparency and 67/100 in the Freedom Index respectively, we have a long way to go.
(Originally published September 23rd 2021 in transfin.in)
