By: Sonam S. DhondeSource: Roll No.07www.businessweek.com MMS-2On 30th August 2012
Regional economic powerhouses-large populations,large resource bases, and large marketsAdopting open door policies to replace theirtraditional state policies that failed to producesustainable economic growth.World’s fastest growing economies– By 2020, the five biggest emerging markets share of world output will double to 16.1 percent from 7.8 percent in 1992.– They will also become more significant buyers of goods and services than industrialized countriesCritical participants in the worlds major political,economic, and social affairs.
The developed world - GNP of over $10K per capita-constitutes only 14% of the world’s population86% of the world – the emerging markets - has a GNPof less than $10K per capitaIt is this 86% that represents the future of globalcommerce 14% 86% GNP per capita greater than $10K GNP per capita less than $10K
Emerging markets present opportunities.Even though they are as beset by Europe as the rest ofthe world and have additional problems of their own.
Demanding markets, culture and environments “Don’t build a car when you need a bullock cart”Rapidly changing markets Develop with the marketYouthful and growing populations Think YoungLimited income and space Grow big by thinking smallWeak supply and distribution channels Take the market to the peopleUnderdeveloped infrastructure ‘Bring your own infrastructure/ Look for the Leapfrog’
Beyond the great cloud of uncertainly rising from theold continent, China, depends on Europe as a marketfor its exports.Many other emerging economies depend on China asa market.Emerging equity markets have performed poorlysince spring.Chinas Shanghai Composite Index fell about 8% tomid-year from its highs of early spring.Brazils Bovespa Stock Index did even worse, fallingsome 15% during that time.Indias SENSEX Index, though it moved off its lows inJune, still showed a drop of approximately 9%.
Brazils real lost about 15% of its value against thedollar during those monthsIndias rupee lost 14%.Chinas yuan, which faces considerable diplomaticpressure to appreciate, gave up about 1.0% of itsdollar value.High market correlations will likely persist in a worldresponding more to global macro developments,such as Europes crisis, then to company, sector, oreven national problems.
Chinas economic prospects have sufferedfrom three adverse influences.o Europes debt crisis and that continents attendant recession.o Legacy of last years monetary restraint.o Chinas burst housing bubble - should abate.
The European Union (EU) is the single largest market forChinese exports, and exports are the single biggestgrowth driver in that economy.With deepening Europes recession, there is little hopefor relief on this front, though any viable rescuemechanism.Especially if the European Central Bank (ECB) makes itsimmense financial resources available, could lift spiritsand valuations in all markets and economies, includingChina and other emerging markets.
Beijing put on the policy brakes. Fearing a rise in inflationtoward 8% or more a year, it engaged in a majormonetary tightening.The Peoples Bank of China (PBC) in 2011 drainedliquidity from Chinese markets by raising the percent ofreserves banks had to hold against their loans anddeposits and by raising target interest rates both severaltimes.The economy still labors under the lingering effects ofthat restraint. But things are changing.
With inflation back down to the much moreacceptable 3% annual rate, Beijing has begun toreverse last years policy.The PBC has recently cut its benchmark interest rateand reduced the reserves required of banks.They feared a "liquidity trap" in which monetary easeloses its economic effect.But such fears were likely misplaced.
Chinese house buyers are not nearly as leveraged as wereAmericans.By law in China people must put down at least 20% of thepropertys cost on their first house and at least 50% on theirsecond.Few in China find themselves "under water" on their mortgages.Chinas debt burden lies largely with local governments.China should work off its excessive housing inventory far fasterthan the U.S.There are, after all, 11 million marriages a year in China andsome 10 million to 12 million people a year migrate from thecountryside into Chinas cities.
It also is clear that many Chinese have begun to takeadvantage of now reduced mortgage rates, especiallydiscounts of 15% for first-time homebuyers.Major cities already report increased transactions. Thoughhousing prices are down 25% from their peak of a couple ofyears ago, recent month-to-month figures show relativepricing stability.
Beijing, worried over speculation, has moved morecautiously than it did with its huge 2008 stimulus.But still the government has done much: streamlinedapprovals for new business development and offered taxbreaks for businesses.Fast-tracked some 66 billion yuan ($10.5 billion) ofinfrastructure projects, including huge investments in threesteel plants, hydropower plants, and airports; increasedfinance for 2.3 million additional public housing rentalunits; and provided 36 billion yuan ($5.7 billion) in subsidiesfor the purchase of energy-saving household appliances. Since Chinas households save at a rate of 51% of theirdisposable income, they surely can take advantage of suchlargess.
It would strain credulity to suggest that such efforts canallow China to reach its old 10% to 12% yearly real growthrate.Chinas need for fundamental, longer-term adjustments,away from export dependence and toward broad domesticdevelopment, will keep growth slower than in the past.But matters look poised to allow China to meet its 7.5%real annual growth target.
That alone should provide some relief given todaysdepressed pricing.Such growth should also help lift many of the otheremerging economies that depend on China, Brazil,and other more purely commodity-dependenteconomies.The picture, though far from robust, is better thanthe expectations implicit in todays pricing.