In a move that could help them reduce borrowing costs, the Reserve Bank of India last week allowed Indian firms to raise debt in Chinese renminbi, up to a collective total of $1 billion.
The move is significant for two reasons. One, it is an indication of how economic ties between the two Asian giants are deepening, despite a large list of disagreements. Two, it shows that Chinese moves to internationalize its currency are on track at a time when the entire euro project is looking shaky while the US dollar could lose its prominence in the years ahead.
Indian companies with trading and investment links with China can now settle transactions by borrowing directly in renminbi, instead of raising money in US dollar and converting it to the Chinese currency, which would be more expensive.
Trade between India and China has grown at 40% year-on-year and stood at $60 billion last year. China remains India’s largest trading partner, accounting for 9.09% of India’s international trade during 2009-10.
Indian power firms could be the biggest beneficiaries. India is targeting 100,000MW of additional electricity capacity in the next five years and needs an investment of over US$400 billion in the power sector to reduce electricity deficits. India’s present power capacity is 170,000MW. Indian firms can now use this facility to finance power sector projects.
Power equipment imports from China have been growing rapidly, much to the irritation of local capital goods companies. According to industry lobby Assocham, Indian power producers have placed orders of power plant equipment, for around 50,000 MW generation capacity, from Chinese suppliers, resulting in a “loss” of about Rs 50,000 crore to the domestic equipment manufacturing companies.
However, there are risks involved as well. The banks through which overseas corporations raise loans are China Exim Bank and China Development Bank (CDB); these are state owned and are known to advance China’s strategic interests even while issuing commercial loans. Critics allege that these banks in the past have suspended loans before the completion of projects to put pressure on the home countries of borrowers to settle unrelated commercial disputes to China’s advantage.
It is also risky to borrow in renminbi as it remains undervalued and is not freely tradable in the international financial markets, and the volume of trade remains low in Hong Kong and London currency markets. Also since Indians are not likely to earn revenues in Chinese currency, there cannot be a natural hedge as well.