People’s Bank of China (PBoC) — China’s central bank has bought an additional stake in India’s biggest private home lender Housing Development Finance Corporation (HDFC) which has worried Indian investors and sent the alarm bells ringing

The fact that the PBoC purchased equity stake has been the source of intrigue as it is highly unusual for a bank to buy an equity stake in another bank as equities by nature entail betting on the unknown.

PBoC previously held 0.8% shares in HDFC and recently increased its stake to 1.01%. Indian financial laws state that a company needs to disclose shareholding changes to the exchanges at the end of every quarter if an investor’s stake crosses 1 percent.

PboC currently holds 17.49 million equity shares in HDFC. The announcement has weakened market sentiment in India after which HDFC shares fell by around 3 percent. According to a report by Mint, the additional purchase has worried the Indian Government as no red flag was raised over the development although there is no rule currently in place that bans Chinese investment in an Indian entity.

“No less an institution than a central bank of the world’s second-largest economy has bought a stake in one of India’s largest financial institutions. Normally, there would be no need for xenophobic hysteria over this but a central bank buying an equity stake in a commercial bank is highly unusual. No red flag was raised,” a source close to Finance Ministry told Mint.

HFDC’s chairman Deepak Parekh clarified that PBoC had bought the stake on behalf of China’s sovereign wealth fund SAFE. Sovereign wealth funds are state-owned investment funds which park a country’s excess cash in entities across the globe to get better returns.

The stake has been bought by the Chinese bank at a time when bad loans in China are expected to soar and HDFC stock is expected to gain 17 percent in next year according to JP Morgan. Not just China’s PBoC, but Singapore’s Temasek, Abu Dhabi Government’s Investment Authority, Norwegian Central Bank NORGES and Saudi Arabia’s Saudi Arabian Monetary Authority (SAMA) also have stakes in HDFC.

In fact, the Singapore Government holds 3.3 percent, Abu Dhabi Government and NORGES hold 1.1 percent each while SAMA has 0.7 percent stakes in HDFC. It is interesting to note that foreign portfolio investors hold 70.88 percent stakes in HDFC.

Another reason for PBoC to increase its share in HDFC is because the latter has a stake in HDFC Bank, HDFC Asset Management Company, HDFC Life Insurance and HDB Financial Securities and HDFC Securities which will allow PBoC to participate in the share of profits of all of these companies indirectly.

An important factor that might have influenced PBoC’s decision in investing in HDFC lies perhaps in China’s belief that after the lockdown is lifted, Modi Government may announce a big financial package to revive demand in the Real Estate sector boosting HDFC’s profitability.

Analysts have warned that a lot of Chinese investments, unlike others, is aimed to consolidate its geopolitical print. According to an Economic Times report — Industrial and Commercial Bank of China (ICBC) and China Investment Corporation (CIC) are said to be on the lookout for better investment opportunities in India’s financial sector and have a purse of around $600-650 million. ICBC in 2018 had set up a $200 million fund to buy stakes in India’s small, medium and micro-enterprises.

Indian conglomerates are not just worried by the Chinese investment but also by the takeover attempts by other foreign entities at a time of falling stock prices. Indian companies stand as guarantors of their subsidiaries abroad and are increasingly worried that a liquidity crunch and fall in earnings may make servicing of the debts of such subsidiaries impossible thereby allowing foreign entities to take over.

The three-month moratorium accorded by domestic banks on loan repayments has not been offered by offshore banks.

Some economic experts feel that the Indian Government can learn from its European counterparts who have tightened foreign investment rules since 2007.

“The Indian establishment too should tighten foreign investment rules especially in the backdrop of coronavirus pandemic that has halted all economic activity and prevent fear that has stemmed from PBoC’s additional investment from turning into paranoia,” said an expert.

Indian Government and businesses also had a major reason to worry as China’s economic print has grown exponentially in Asia and in the world and it is now looking to extend this economic print to India’s strategic areas.

Apart from China’s growing presence in India’s banking, telecom, engineering, manufacturing, education, and other sectors, the Chinese are also making strategic investments in mineral-rich states like Chhattisgarh.

Last year, the then Home Secretary and current Cabinet secretary Rajiv Gauba had held a discreet meeting with senior Government and intelligence officials to discuss increasing Chinese presence in India.

The minutes of the meeting obtained by Firstpost revealed that senior Government functionaries were apprehensive about growing Chinese presence in the Indian market given that Beijing continues to practice discriminatory and restrictive practices against Indian and western corporations.