China’s Central Bank Buys a 1 Percent Stake in HDFC

China’s central bank recently increased its shareholding in India’s largest mortgage company HDFC to 1.01 per cent. It bought 1.75 crore shares worth nearly Rs 3,000 crores at a time when global stock markets were bruised and battered. The news of the purchase raised eyebrows as governments and central banks across the world are busy waging a war against the COVID-19 pandemic.

This comes at a time when HDFC along with other blue-chip stocks lost over 30 to 40 per cent of their share value in the market sell-off following the virus outbreak. People’s Bank of China (PBoC), which owned 0.8 percent of HDFC increased its stake to 1.01 per cent during this correction. Therefore the timing of the purchase received huge coverage and fueled controversy too.

Timing :

Several foreign banks and investors have held a stake in HDFC. In fact, over 70 per cent of HDFC’s shareholders are foreign institutional investors. Market pundits are apprehensive of the fact that these share purchases were made during January and March, at a time when the virus outbreak started to disrupt global economic activity and even China was battling the virus.

Social media was flooded with theories suggesting China’s ill-intentions and opportunistic behaviour, however, the HDFC’s top brass told the media that PBoC share purchase was in line with the regulatory norms. The disclosure was made recently as its stakes had hit 1 percent regulatory threshold.

HDFC chairman Deepak Parekh also told a news channel that the share purchase is not unusual and that other sovereign wealth funds also hold a stake in HDFC. He said that along with PBoC, Saudi Arabian Monetary Authority (SAMA) — equivalent to the country’s central bank — holds a stake in the company.

PBoC’s shops during crises?

In 2014, during the Eurozone debt crisis, the PBoC had purchased stakes in many highly-rated Italian companies. Among them were Italy’s largest insurer Generali, carmaker Fiat,  oil and gas firm Eni and utility major ENEL. Earlier (in 2007) China’s central bank bought stakes in one of Britain’s largest gas manufacturers, BG Group.

The relevance of 1 per cent stake :

As soon as the news of PBoC stake purchase came in, Twitter users and several retail investors reacted sharply. Several conspiracy theories suggest that China is trying to use the pandemic to take advantage of the correction in stocks but an important question is if 1 per cent stake in the largest mortgage lender is big enough to influence HDFC’s board?

Going by HDFC chairman Deepak Parekh’s statements, it’s a big no. Experts also suggest that the stake as small as 1 per cent is no cause to worry. It does not give the People’s Bank of China enough influence over the HDFC’s board to change policies or interest rates.

Therefore, PBoC’s stock purchase may just be a testimony that HDFC was trading fairly lower than what it should be. It may also mean that India’s housing market is currently undervalued. If the investment is pouring in times when business is slowing down, it is indicative of the potential in the Indian market and the expectation that it will recover.

Cause for concern :

China’s past investments in several infrastructure projects have been a cause of concern. Experts see it as China’s attempt to gain political and economic influence over its neighbours.

There have been several such instances such as the China-Pakistan Economic Corridor. China invested heavily in Pakistan, providing it access and influence in the region.

Another example was the building of the Hambantota port in Sri Lanka. First, the port was built with massive loans provided by the Chinese government, and when the Sri Lankan government found it difficult to pay back, the control of the port went to the Chinese. Therefore China now owns the port, via a 99-year lease, and thousands of kilometres of land around the port.

But HDFC’s stake purchase is completely different from them.

HDFC’s current shareholding pattern :

Currently, nearly 71 percent of HDFC’s shares are held by Foreign Portfolio Investors (FPIs). Insurance companies hold 8 per cent while 7 per cent is held by retail investors. High net individuals hold 1.3 per cent and 3.4 percent is owned by others.

Conclusion:

While it is of utmost importance to keep track of foreign investments in India, it is worth noting that India has very sound norms to protect systemically important firms to land into foreign hands. The stake purchase of HDFC by PBoC was unusual but well within the regulatory norms set by the government. Besides, it must be noted that the 1 per cent stake is too small to influence the firm’s decision making. In all probabilities, People’s Bank of China is betting on recovery by blue-chips stocks like HDFC.