BREAKINGVIEWS: India's Reliance on Chinese cash comes with risks

[beijingwalker]

BREAKINGVIEWS: India's Reliance on Chinese cash comes with risks


By Jeff Glekin

MUMBAI | Tue Jan 17, 2012 5:40pm IST

(Reuters Breakingviews) - India Inc is feeling the pinch as dollar liquidity dries up. With European banks retrenching, Asian competitors are picking up the slack. It's nice to have options but Chinese funding is still seen as a last resort. Politically hard to swallow, it often comes with strings attached.

Anil Ambani's Reliance Communications (RLCM.NS), India's second-largest mobile phone carrier, has just raised funds from several Chinese banks to refinance $1.18 billion of outstanding foreign currency convertible bonds. At present, it is not clear if any strings are attached to this deal. However, Reliance also borrowed from China last March when China Development Bank arranged loans worth $1.93 billion. Those funds were used to finance the purchase of radio spectrum as well as equipment from China's Huawei Technologies.

Though businesses may be wary of similar deals tied to purchase of Chinese equipment, they may have little choice. Surging interest rates at home prompted many Indian companies to raise $30 billion offshore last year. Many are exposed to currency losses after the rupee lost nearly 18 percent of its value. What's more, risk aversion among European banks has pushed up the cost and availability of offshore debt. Reliance is paying only 5 percent for its loan.

The squeeze is most acute for firms such as Tata Steel (TISC.NS) and JSW Steel (JSTL.NS) which will be looking to refinance existing debt. Some $7.8 billion of convertibles need to be redeemed or converted by the end of this year, according India Infoline. Given the plunge in the stock market over the past year, the bulk will have to be redeemed.

India Inc as well as policymakers won't like having to rely on its more powerful neighbour across the Himalayas for funding, particularly since Chinese banks have an express mandate to advance the country's national interest. On the other hand, any source of funding is better than running out of cash. What's more, if Chinese banks subsidise loans that no one else will touch, they could be ones that end up feeling the pain.

CONTEXT NEWS

-- Reliance Communications, India's second-largest mobile phone carrier, has raised funding from several Chinese banks to refinance $1.18 billion of outstanding foreign currency convertible bonds. The firm, controlled by Anil Ambani, said on January 17 that Industrial and Commercial Bank of China, China Development Bank Corporation, Export Import Bank of China and other banks would provide seven-year loans at an interest cost of about 5 percent.

-- Reliance Communications borrowed from China last March when China Development Bank arranged loans worth $1.93 billion. Those funds were used to finance the purchase of radio spectrum as well as equipment from China's Huawei Technologies.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Hugo Dixon and David Evans)

BREAKINGVIEWS: India's Reliance on Chinese cash comes with risks | Reuters

 

[Chinese-Dragon]

The Indian Government is having some serious cash-flow problems.

The bad news on government finances couldn't have come at a worse time given that the economy is in the throes of a slowdown and there is little chance of returning to the legally-mandated fiscal deficit of 3% of GDP. By the time elections in states such as Gujarat end late next year, UPA-2 will be donning poll gear for the 2014 general elections . In 2008, a year before the last general elections, UPA had chosen the budget to sound the poll bugle through moves such as the Rs 70,000 crore farm loan waiver.

Fiscal deficit may swell to 5.2% - The Times of India

And their trade deficit is getting really bad as well:

India’s trade deficit widened the most in October in at least 17 years, adding pressure on the rupee, Asia’s worst performing currency this year.

Indian Trade Deficit Widens the Most in 17 years - Bloomberg

 

[EndoClock]

How much debt do these companies carry?