On February 27, China proved once and for all that it matters in the world's global capital markets. When its inflated Shanghai Composite Index pitched downwards 8.8% – amid worries about the introduction of a capital gains tax on stock investments and unease about the possibility of future interest rate hikes – few might have predicted that stock markets from Europe to the United States would be affected too. Asian and international stock markets have been stopping and starting ever since.
The ripple effect just goes to show how out of proportion the sentiment towards China is getting. The country's economy is certainly growing, but its domestic capital markets remain firmly partitioned from the global markets; only US$9.9 billion of institutional foreign funds can invest in its onshore stocks and bonds, and its nascent derivatives markets are tough for even banks to access for hedging, let alone offshore investors. Still, the correction will not persuade Chinese authorities to throw open their doors to profit-minded international fund managers and notoriously mercurial hedge funds – even though they would be more likely to invest responsibly than a domestic base that lacks investment options and is hypnotised by the country's self-proclaimed economic miracle.
In some ways China's experiences mirror those of Asia's other big emerging prospect: India. Its Sensex index dropped 1.3% following the news of China's correction, in large part because it also looked inflated. And the market has its own fair share of red tape – India and China both have restrictions on electronic trading, for example.
But India's markets are much more open to foreign investment; international investors are fairly free to enter and leave and, as a result, they are keen to build exposure. The country also offers the investment banks opportunities that are currently unavailable in China; many of India's suddenly-self-assured businesses are spinning off domestic assets and seeking leveraged financing to help them to follow in the footsteps of corporate champions Tata Steel and Hindalco in making major international acquisitions.
Given these opportunities, Morgan Stanley's decision to follow Merrill Lynch and Goldman Sachs and break up its Indian joint-venture (JV) does not surprise. The bank spent US$425 million to buy the 49% stake of the JV owned by JM Financial, but it had to give up the investment banking, fixed income and retail operations of the venture to do so. Getting out of the JV would have been much cheaper a year or two ago, but at least Morgan Stanley now has full control of its own name. Meanwhile, Credit Suisse, ignominiously thrown out of India in 2001 for alleged price manipulation, is also coming back, and Deutsche Bank wants to build out too.
It all points to the fact that India is willing to embrace the expertise and competition that international banks bring – even if they have abused this trust in the past. China, in contrast, is set on keeping its brokers as sheltered as its derivatives and equities markets, scared that unscrupulous foreign firms will take over. Banning foreign competition might be a useful short-term solution, but Indian companies are enjoying levels of international investor support that are simply unavailable to their Sino counterparts. China's bad news might move world markets, but India's companies stand to profit from them.