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79 i chronicle

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Cover Story China Running out of Breath …

Cover Story China Running out of Breath
Outlook Crude Oil
Stats India Trade Deficit FY-2014
Emerging Country Russia
In Focus Land Acquisition Bill- A Snapshot

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  • 1. Investeurs Chronicle September 2013, Volume: 79
  • 2. Cover Story China posted its lowest growth in two decades for the second quarter of 2013, and there had been fresh concerns that the world's second-largest economy might be headed for a so-called "hard landing. A dose of creative destruction back in the late1990s—the closure or privatization of inefficient state-owned enterprises—combined with easy credit, local fiscal stimulus, and strong exports helped the Chinese economy grow by leaps and bounds and become the world’s second largest economy. Nowadays that momentum is slowing, and many economic analysts and international agencies see even lower growth rates ahead. Even Chinese officials have grown pessimistic, with finance minister Lou Jiweito expecting a 7% GDP growth in 2013. Anything north of 7% is a good number compared to anemic growth elsewhere. Nonetheless, China observers are concerned about the growing corporate and local government debt and the safety of its banking system. Chinese companies and local governments have borrowed recklessly to build factories, train stations, and bridges, which are largely empty and unused. That would certainly spell trouble for the country’s state-owned banking system, which has financed these projects. Simply put, building bridges that too few people travel, train stations that too few people visit, and buildings that remain vacant, is hardly a way to place an economy on a path to sustainable growth. While such projects create what standard macroeconomic textbooks describe as multiplier effect — multiple rounds of income and spending that boost economic growth while the project lasts – they fail to create the accelerator effect that boosts economic growth once these projects are finished and placed in use. From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion Yuan ($5.4 trillion) in new loans, equal to 73 percent of China’s GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing’s stimulus package. Unlike deficit-financed stimulus packages in the West, China’s colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing. China doing ‘Japan’ act After decades of emulating Japan's export-driven economic miracle, China appears in danger of following it into the same kind of economic coma that Japan is trying to wake up from 20 years later. China is struggling to wean itself off its reliance on exports for growth and credit-fuelled investment. That has left its economy lopsided, economists say, with massive over investment in property and industries rapidly losing their cost advantage, from mining and electronics to cars and textiles. Wages are rising, the return on investments falling. Add a population graying faster than Japan's did, and economists worry China may be attempting the impossible. China Running out of Breath
  • 3. Cover Story Deflation may seem unlikely in an economy still growing at a 7.5 percent clip and where consumer prices are rising 2.7 percent a year. But economists warn that China in many ways resembles Japan in 1989, two years before its crash. Like Japan, China relied on banks to funnel investment into export industries to create jobs and finance development. In return, interest rates were regulated to ensure banks a healthy profit. Because the most profitable loans were those to the least-risky borrowers, banks concentrated their lending on big state-owned companies. China tried to partially liberalize the financial sector, creating new avenues of finance, a bond market and other non-bank lending. But as in Japan, this encouraged banks to lend more, not more wisely, helping fuel a property bubble. Things got worse in 2009, when China launched a 4 trillion Yuan, credit-powered stimulus to ward off the global crisis. While Japan saw credit expand from 127 percent of GDP to 176 percent between 1980 and 1990, China's credit rose from 105 percent in 2000 to 187 percent of GDP last year, JPMorgan Chase in Hong Kong says. China's problem now is that each Yuan of new investment is yielding a diminishing amount of new GDP. The slowdown is already creating signs of deflationary pressure: producer prices have been falling for 16 months and Morgan Stanley notes that real borrowing costs of 8.7 percent are outpacing the sector's growth. One risk, therefore, is that China's reforms push growth low enough to trigger a wave of defaults that shakes the entire financial system. The bigger risk, is that to avoid social unrest Beijing refuses to tolerate such pain, instead encouraging banks to keep troubled borrowers afloat by rolling over their loans like Japan's banks did in the 1990s, preventing them from lending to profitable new ventures that could revive growth. Beijing's recent efforts to blunt the slowdown are drawing mixed reviews- cut on taxes on small businesses and red tape for importers is seen as welcome restructuring, while boosting credit for foreign trade and speeding up railway investment smacks of mini-bailouts. However, there is a light at the end of the tunnel. China's poor, inland provinces do not suffer from overcapacity and it will not take long before China needs the infrastructure projects that now might look like white elephants. Also the government has been undertaking key structural reforms, such as liberalizing interest rates, allowing its currency to strengthen, and taking steps to reduce its dependency on exports. What China now needs is another dose of creative destruction. It needs to sever government-to-government relations — which misallocate capital — and make the transformation from an export-led economy to a consumer-led economy.
  • 4. The ongoing Syrian conflict -- particularly whether or not the U.S. will intervene -- a tightening global supply picture in view of the output loss from disruptions in Libya, together with positive momentum in the domestic manufacturing sector and bullish data from the Chinese economy have strengthened oil prices to 2-year highs of around $110 per barrel. Monthly average crude oil prices increased for the fourth consecutive month in August 2013. In August itself, unplanned disruptions among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers reached an estimated 2.7 million barrels per day (bbl/d), the highest level since at least January 2011. Brent crude oil spot price averaged $108 per barrel during the first half of 2013 and as tension over the U.S. military intervention over Syria show signs of settling down; we are likely to experience a pressure in the price of a barrel of oil. Price of Brent Crude Oil is expected to average $109 per barrel over the second half of 2013 and $102 per barrel in 2014. India Trade Deficit FY-2014 Stats Outlook-Crude Oil Gloss Reflation An act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy (specifically price level) back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation, which seeks to return the economy back down to the long-term trend.
  • 5. Emerging Country- Russia Russia, also officially known as the Russian Federation is a country in northern Eurasia. From northwest to southeast, Russia shares land borders with Norway, Finland, Estonia, Latvia, Lithuania and Poland, Belarus, Ukraine, Georgia, Azerbaijan, Kazakhstan, China, Mongolia, and North Korea. It shares maritime borders with Japan by the Sea of Okhotsk and the US state of Alaska across the Bering Strait. Russia is the largest country in the world, covering more than one-eighth of the Earth's inhabited land area. Russia's $2 trillion economy could stagnate, but played down risks of a recession. Petroleum, petroleum products, food grains, chemicals and defense arms are some of the industries in Russia. The industrial sector of Russia contributes around 34.8% of the total GDP of the country. The economy of Russia grew 3.4% in 2012, down from 4.3% in 2011. Growth will continue slowing further to 3.3% in 2013, and then is set up to pick up modestly to 3.6% in 2014. GDP growth below 3% meant stagnation while the economy’s expansion by 3- 4.5% suggested weak and unstable growth. Growth declined mainly due to the weaker performance of investment. Inflation continues to be high year-on-year inflation reached 7.1% in January 2013, compared to 4.2% in January 2012. The increase in inflation in Russia is striking from an international perspective and is related to three factors. First, it reflects the increase in food inflation triggered by the drought in Russia and among international grain producers, as well as higher excise taxes on alcohol. In July of 2013, Russian trade surplus increased to 13.3 billion USD, from 11.5 billion USD a year earlier. Exports increased for the second month in a row by 5.5% year-on-year, boosted by shipments to the non-CIS countries. Exports increased to 43.45 billion USD, from 41.59 billion in July and 41.18 billion a year ago. Imports rose to 30.14 billion USD in July, from 27.94 billion USD in June and 29.7 billion USD a year earlier. Imports from the CIS countries led the expansion and rose 6.8 % yoy. Foreign direct investment (FDI) in Russia grew 63.2% year-on-year in Q1 2013 to $6.304 billion. The FDI included $1.148 billion in equity investment, down 38%; $4.726 billion in loans from the foreign co-owners of companies, up 180%; $1 million in leasing, down 82.2%; and $429 million in other direct investment, up 35.9%. The Indo-Russian strategic partnership has been built on five major components: politics, defence, civil nuclear energy, anti- terrorism co-operation and space. India-Russia bilateral trade, which stood at US$ 7.46 billion in 2009, US$ 8.53 billion in 2010, and US$ 8.87 billion in 2011, has spurted to US$11.04 billion in 2012, registering a 24.5% growth in 2012 compared to 2011 and was well on the way to reach the $20-billion target by 2015. However current profile of trade is dominated by commodities with large imports of iron, steel, fertilizer and oil from Russia which is Russia’s foremost export to India, and pharmaceuticals, which is India’s number one export to Russia. Vital Economic Statistics of Russia Economy Particulars Details GDP (nominal) $2.014 trillion (2012 estimates) GDP growth rate 2.5% (2013 estimates) Currency Russian ruble Credit Rating Baa1- (Moody’s) BBB- (Fitch) BBB- (S&P) Fiscal Deficit 0.02% of GDP (2012) Current account Surplus $85.06 billion (2012)
  • 6. In FocusForex Land Acquisition Bill- A snapshot The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2012, passed by the Lower House or LokSabha on 29th Aug 2013 aims to provide fair settlement to the displaced during land acquisition. It aims to plug the loopholes in the The Land Acquisition Act 1894, its predecessor. Following are the highlights of the Land Acquisition Bill: -Payment of compensations that is up to 4 times the market value in rural areas and 2 times the market value in urban areas. - To address historical injustice the Bill applies retrospectively to cases where no land acquisition award has been made. - In cases where PPP projects are involved or acquisition is taking place for private companies, the Bill requires the consent of no less than 70 per cent and 80 per cent respectively (in both cases) of those whose land is sought to be acquired. -To safeguard food security and to prevent arbitrary acquisition, the Bill directs States to impose limits on the area under agricultural cultivation that can be acquired. -In case land remains unutilized after acquisition, the new Bill empowers states to return the land either to the owner or to the State Land Bank. Before land is acquired, a report assessing the social impact of the land purchase on those living in the area must be prepared in consultation with the village council in rural areas and local residents associations in urban areas. The report must be evaluated by an expert panel consisting of two independent social scientists, two experts on rehabilitation and a technical expert on the subject relating to the project for which the land is being acquired. Critics of the bill are of the view that the land may be undervalued and not necessarily account for recent appreciation in prices. Therefore, the compensation, they argue, may not reflect true market rates. However, others say that land prices in India are already high and the bill will make purchases in some areas impossibly expensive. The fear is, this will deter investment, stunting growth and delaying the much needed development of infrastructure. Others argue that the time taken to prepare assessment reports may delay government projects, such as community toilets or bus stops. Having to wait for a social impact report may also tie the process of purchasing land in red tape for private companies wanting to invest in the country. Data from 2nd September 2013 to 13th September 2013 Sensex Nifty 18,886 .13 19,732 .76 5550. 75 5850. 60 Gold (10 gm) Silver (1 Kg) 33018 29578 54875 49286 Crude Oil ($/barrel) Dollar/INR 114.01 111.70 65.86 63.79
  • 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com