BackCan China's stamp duty cut on stock trades accelerate FII outflows from India? Experts weigh in
China reduced stamp duty on stock trading by 50 per cent in an effort to boost market sentiment and attract investors. China's economy has been struggling in the wake of the Covid-19 pandemic.
PremiumTo boost the confidence of investors and provide a substantial impetus to overall market sentiment, China has implemented a significant measure by reducing the stamp duty on stock trading by fifty per cent, starting Monday. According to a Bloomberg report citing the Chinese Ministry of Finance, the levy charged on stock trades will fall from 0.1 per cent to 0.05 per cent as of August 28.
China also vowed to slow the pace of initial public offerings (IPOs). The China Securities Regulatory Commission (CSRC) has cited recent market conditions as its rationale for slowing the pace of IPOs.
Read more: China lowers stamp duty on stock trades, tightens IPOs to woo investors
Beijing's current move is aimed at giving a boost to market sentiment as the world's second-largest economy has been struggling in the wake of the Covid-19 pandemic.
Earlier in August, China's central bank went for a smaller-than-expected cut in a key lending benchmark to boost economic recovery. However, the demand for a more robust policy response and hefty government spending is growing.
Could it mean more FII outflow from India?
China's stamp duty cut is expected to have a very short-term impact on the Chinese market and it is unlikely to have a significant impact on other emerging markets (EMs) like India. Experts do not see a risk of foreign capital outflow from the Indian market because of this.
Investor apprehensions are currently centred around China's economic well-being. Without a robust and impactful policy response coupled with substantial government investments, the prospects for the Chinese market could continue to appear subdued.
"China has not only halved the stamp duty but also lowered the margin requirements for buying stocks. Both these steps would help in boosting the markets in the short term," said Nitin Agrawal, CEO of Torus Oro PMS.
"Foreign investors are still concerned about the long-term prospects of the Chinese economy and the market has seen record selling from foreign investors over the past few weeks. The property sector is also in bad shape and the stamp duty cut is not going to change long-term fundamentals. We don't see a risk of any outflow of foreign capital from India due to this," said Agrawal.
Swapnil Shah, Director of Research at StoxBox said though a knee-jerk positive reaction to the announcement is on the cards, he does not foresee a long-term optimism emanating from this announcement as the economy has been marred with multiple issues such as a slowdown in economic growth, property market crisis and weak consumption patterns.
"We believe that capital inflow/outflow from an economy is dependent on more broad-based factors which include political landscape, economic health, monetary policy, valuation comfort vis-à-vis other economies and growth prospects of sectors and companies. With China lagging on most of these fronts, China needs a structural reset rather than opting for short-term fixes in order to boost market confidence," said Shah.
Read more: China’s economic troubles mark the end of its geopolitical ascent
Shrey Jain, Founder and CEO of SAS Online - India's Deep Discount Broker, observed that the CSI 300 index has experienced an approximately 8 per cent decline over the past month, and since its peak in February 2021, it has recorded a substantial drop of around 36 per cent. This downward trajectory is accompanied by a consistent stream of unfavourable news.
"There is a mattress mentality, people are sticking their under the mattress, not spending, not buying stocks. Such a policy will likely give a short-term boost to the market but won't have much effect over the long run," said Jain.
"Foreign investors remain reluctant to invest in China due to a combination of negative news, subdued sentiment, and geopolitical uncertainties. A concerning trend has emerged, with foreign investors consistently selling off their holdings for 13 consecutive sessions, marking the longest such streak on record. To foster sustained FII confidence and promote market participation, Chinese authorities should consider implementing more comprehensive measures," said Jain.
Trivesh D, COO of Tradejini also believes the move will not have any long-term impact.
"Any reduction in stamp duty, being a transactional cost will not have a long-term impact on the stock market. Any long-term impact on the stock market is created by investors who predominately invest for longer timeframes, and are agnostic to such changes thereby not affecting their investment decisions," said Trivesh.
He added that the foreign capital infused for the purpose of intraday trading, swing trading, positional trading and directional trading may see some inflow on account of a reduction in the stamp duty cost. However, foreign capital meant for investments with a long-term view will not look at this reduction in the stamp duty cost as an attractive factor to pivot their current investments which are deployed in growing investments in the Indian stock market to a politically challenged Chinese economy.
"We do not see any major change in the stance of FIIs and their investment strategy on account of the reduction in stamp duty cost," said Trivesh.
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Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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