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

MUMBAI Tue Jan 17, 2012 5:40pm IST

A man walks past a logo of Reliance Communication before the Annual General Meeting in Mumbai September 22, 2009. REUTERS/Arko Datta/Files

A man walks past a logo of Reliance Communication before the Annual General Meeting in Mumbai September 22, 2009.

Credit: Reuters/Arko Datta/Files

Related Topics

Stocks

   

MUMBAI (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)

FILED UNDER:

Reuters Showcase

HCL Technologies

HCL Technologies

Software services exporter posts 28 pct rise in Q2 profit  Full Article 

Google Revenue

Google Revenue

Fourth-qtr revenue misses Wall Street target  Full Article 

Uber's Woes

Uber's Woes

Uber, other taxi-hailing apps hit new roadblock in Delhi.  Full Article 

Transfer Pricing

Transfer Pricing

India's Vodafone decision eases tax worries for Shell, others.  Full Article 

Renewable Energy

Renewable Energy

NTPC bars foreign bids for three solar projects  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage