Chinese stocks go on wild ride as economic gloom deepens

SHANGHAI/BEIJING Chinese stock markets took a wild ride on Wednesday, tumbling and soaring in a session that made little sense other than to highlight that investors have almost no faith in a month-long government effort to stabilize them.

The Shanghai and Shenzhen markets fell 3 percent in morning trade, taking their losses to more than 8 percent since investors stampeded without warning on Tuesday.

But state-backed buyers later rushed in, enabling stocks to finish the day more than 1 percent higher.

It is a pattern that has been repeated several times since Beijings national team, a coalition of state-backed financial institutions and regulators, went into action early last month with instructions to halt a crash in share prices.

Investors say Chinas stock markets – which were never for the faint of heart – have become dysfunctional since the governments massive and unprecedented rescue effort.

Prices move sharply on speculation about the national teams activities as investors focus on making quick trading profits by pre-empting its next move.

Late in the afternoon on Wednesday, a slew of companies announced state funds had bought stakes in them, which investors took as a sign that the government was signaling its continued support for the market. As of early evening, around 20 firms had made such announcements.

Long-term investors are staying well to the sidelines, moving their cash into bonds and the money market, as roller-coaster markets and a gloomy stream of economic news heighten their anxiety over the worlds second-largest economy.

We advise strapping in for a bumpy ride, said Tim Condon, head of Asia research for ING Bank in Singapore.

The Commerce Ministry added to that anxiety on Wednesday, saying exports could continue falling in coming months, after an 8.3 percent plunge in July, their biggest drop in four months.

The economy is already under threat of deflation and policymakers are struggling to revive bricks-and-mortar investment. Beijings official growth target is 7 percent for this year, but some economists estimate current levels are closer to half that.

Combined exports and imports for the first seven months of 2015 fell 7.2 percent from the same period last year, compared with Beijings full-year target of 6 percent growth.

The possibility of exports to see year-on-year decline in some months could not be ruled out. But we will still see export growth for the whole year, Commerce Ministry spokesman Shen Danyang told a regular monthly briefing.

For the whole year, the foreign trade will face more severe situation than we expected.

Only last month, the ministry predicted exports would improve in the second half of this year from the first half.

CENTRAL BANK INJECTS LIQUIDITY

The Shanghai market closed up 1.2 percent and Shenzhen jumped 2.2 percent. The benchmark CSI300 index .CSI300, comprising blue-chip stocks from both markets, rose 1.6 percent.

The rebound followed news the central bank would offer more medium-term funds to banks, in addition to a 120 billion yuan ($19 billion) injection of funds into money markets on Tuesday.

The central bank confirmed later in the day it lent 110 billion yuan of six-month cash to help maintain sufficient liquidity in the market.

Sources familiar with the medium-term funding plan said this would help offset the drain on liquidity caused by Chinas unexpected devaluation of the yuan last week.

The prospect of further weakening has prompted investors to swap yuan into US dollars.

Capital outflows from China are expected to increase as investors grow more pessimistic over the outlook for the currency and the economy, and calls are growing for the Peoples Bank of China (PBOC) to roll out support measures more swiftly and aggressively to shore up growth.

Highlighting growing anxiety, money-market interest rates ticked higher on Wednesday, despite the fresh fund injections from the central bank. The weighted average benchmark seven-day repurchase agreement rate rose four basis points to 2.53 percent.

The PBOC devalued the currency on Aug. 11, within a few days of the poor July export data and other official figures showing factory-gate prices continued their three-year slide in July, touching a six-year low.

A week later, the central bank is still struggling to control the fallout. Though it insists the yuan has no reason to fall further, most economists believe there is political pressure to let it slowly slide, which will put more competitive pressure on Chinas export-reliant Asian neighbors.

The yuan has fallen 3 percent against the dollar since the eve of the devaluation, but that marks only a partial reversal of its gains over the past 12 months, especially against currencies of major trading partners Japan and the euro zone.

Bank of America Merrill Lynch said on Wednesday the yuan could be allowed to depreciate to 6.5 to the dollar by the end of this year and 6.9 by end 2016, from around 6.40 now.

The devaluation last week triggered falls in other Asian currencies such as those of Australia, New Zealand, Indonesia, Singapore and Taiwan, fuelling fears of a currency war.

On Wednesday, Vietnam devalued the dong for the third time this year as authorities sought to support a languid export sector facing fresh challenges from the Chinese devaluation.

(Additional reporting by Xiaoyi Shao in BEIJING and Kazunori Takada in SHANGHAI; Writing by Mark Bendeich; Editing by Kim Coghill)

Avoid the global noise, decouple from economic markets to play

In the Indian context, we are at the inflexion point of growth revival today. Economic growth is likely to revive sharply, GST or not. If we get GST early ie, in 2016, it might just aid economic growth but it will not generate economic growth as is widely believed. Economic revival in India is a given today. It is going to be driven by factors such as:

— Low and controlled inflation which will be driven by extremely low commodity prices. Crude prices, for example, have corrected by nearly 60% over the last one year, thus giving a push of nearly Rs 4 lakh crore via savings on crude imports on a 12-month run rate basis. Companies are reporting record margins despite poor capacity utilization. As growth picks up, the operating leverage will come into play, and inflation is unlikely to come back soon. Even on food prices, moderate MSP increases and small steps towards improving productivity and wastage will help in the short run. Over the long run, further supply side measures will be required.

— Strong government finances reflected in the recent numbers — indirect tax collection went up by 39% in July. This combined with reduced subsidies will aid government finances, help them push capital expenditure and reduce crowding out from the markets and help bring down interest rates.

— Improved investments reflected in much greater enquiries with companies, better execution as well as a revival in pent up demand. A turn around in demand can be seen in the commercial vehicle segment, where sales are growing at nearly 25%. Various public sector units are also pushing for greater investments as their cash flows improve. For example, railways may make huge savings as diesel prices have come down. That, accompanied by reduced leakages, will boost capital expenditure. Similarly, oil PSUs are seeing huge improvement in cash flows which can go into investments.

— PSU banks recapitalization, combined with promises of greater autonomy and less interference, can drive a value creation cycle and also provide much-needed growth capital in the economy. Some measures on this front have been announced by the government in the form of the seven-pronged reform agenda; more might follow.

— Large funds flow into equity is likely to continue from domestic investors driven by lower interest rates on fixed income, non-performance of gold as an investment, and a likely stagnation in the performance of real estate.

Besides this, the bogey of Yuan depreciation needs to be understood properly. Since the end of the last boom in 2007, the Yuan has appreciated by 20% and the rupee has depreciated by 60% against the US dollar. Currently, while the Yuan has been devalued by 3%, the Indian unit has fallen only 2%. This noise should be totally ignored.

Another huge noise that needs ignoring is the expectations of a hike in interest rates by the US Federal Reserve. As the Fed hikes rates, whenever it does, we will see a huge capital flow into growth assets as this move will be driven by confidence in economic recovery. Feds fears are similar to those at the time when it going to stop bond buying and people had predicted doomsday.

India as an economy and a market is likely to see significant decoupling, not only from the major emerging markets, but also from global equities over the next 3-4 years. This doesnt mean that the effects of a huge short-term sell-off globally will not impact India. That will always happen, however, the economy is now in a sweet spot with most of the negatives behind us, and the likelihood of positive surprises much greater than negatives over this time period.

2003-2007 saw huge decoupling where the performance of major markets differed widely. Since the beginning of early 2003 till the bottom in March 2009, the world index moved down by 17%, while Indian markets were up 240% and the MSCI EM Index was up 166%.

The outperformance really took off after the fall of May 2004.At the beginning of the BRICS rally in 2003, equity markets constituted just around 2-3% of world market capitalization. As of now, they are at around 20%. Over the next two decades, this will move towards at least 50%, if not more.

Decoupling Phase II is around the corner. Choose to play it or miss it.

Sandip Sabharwal is a fund manager who runs an investment advisory company. He can be reached at hiswebsite.

Bad Loans Impede India’s Economic Growth

MUMBAI–Mounting bad-loan ratios at Indian banks are a sign the country’s economy isn’t doing nearly as well as recent rosy output-growth figures suggest.

The sour debt also threatens future expansion, as banks throttle back lending and the government pours billions of dollars into bailouts for state-run banks.

The strategy, dubbed Indradhanush (rainbow), focuses on systemic changes in state-run lenders, including a fresh look at hiring, a comprehensive plan to reduce stress at bloated lenders, capital infusion, accountability incentives with higher rewards, including stock options and cleaning up governance.

The percentage of loans in default at Indian banks stood at 4.3% in December, more than twice the 2010 value, according to the World Bank. That compares with 2.1% in Indonesia and 1.1% in China. Bad loans at US banks fell to 2% last year.

Credit firm India Ratings predicts impaired assets held by Indian banks will rise to 4.5% this year.

“The banking system is not going to contribute to the recovery and GDP growth as people had expected,” warned Jack Deino, head of emerging-markets fixed-income investments at US money manager Invesco Ltd., which manages about $800 billion in assets.

The bad-debt woes at Indian banks are the legacy of a corporate-lending binge between 2008 and 2010, primarily for large infrastructure and industrial development.

As the effects of the global downturn triggered by the 2008 financial crisis swept over India, growth slowed and businesses’ big plans suffered, a problem made worse by government red tape that left many projects unfinished.

Five sectors–mining, steel production, textiles, infrastructure and aviation–account for one-quarter of total bank loans in India and half of distressed assets, according to calculations by the Reserve Bank of India,
EQBANKINDIA

-10.86
%

the nation’s central bank.

State-run banks, which hold 70% of India’s banking assets, are the ones suffering the most, accounting for almost 90% of total bad loans at the end of 2014, according to government reports.

For the quarter ended June 30, Bank of Baroda, India’s second-largest state-owned lender, said gross nonperforming assets rose to 4.13% of total loans from 3.11% a year earlier. At Bank of India, they increased to 6.8% from 3.28%, and at Punjab National Bank to 6.47% from 5.48%. At State Bank of India, the country’s largest by assets, the government-run bank recently said its gross ratio of soured credit rose in the first quarter from the previous three months.

Mr. Deino said he expects bad-loan ratios at public-sector banks to keep deteriorating. That would be bad news for Indian Prime Minister Narendra Modi, who is trying to spur industrialization in India.

After a major revision in how India calculates gross-domestic-product growth, which bumped up growth to 7.5% in the three months to March 31, the country has become the world’s fastest-growing large economy, surpassing China for the second quarter in a row. But while rising imports and accelerating car sales point to stronger demand, other indicators such as weak corporate earnings suggest the new numbers may be overestimating growth.

Banks are still suffering. A study by Swiss bank UBS Group AG says Indian lenders got caught in a vicious circle: They kept lending to highly leveraged conglomerates in the hope growth would pick up again.

Despite efforts by the Project Monitoring Group, a government agency tasked with helping large projects get needed bureaucratic approvals, its head, VP Joy, said more than $200 billion in planned investment is stuck.

At the end of last month, India said it would infuse 700 billion rupees in extra capital into state-run banks over the next four years to help them meet global standards and provide a cushion against bad loans.

On Friday, India’s government, in a move to improve the performance of state-run banks, said it would infuse 250 billion rupees ($3.84 billion) of capital in state-run banks this fiscal year through March, of which 200 billion rupees will be released to 13 lenders, including State Bank of India, Bank of India, IDBI and Bank of Borada, within a month.

“We expect market valuations of public-sector banks to improve on governance reforms, tight management of bad loans and capital allocation by government,” Finance Minister Arun Jaitley said.

Despite the size of the overall plan–which is about 4% of last year’s total government spending–many contend it isn’t enough.

“That’s a good first step, but banks will require a lot more capital in the coming years,” said Saswata Guha, an analyst at Fitch Ratings in Mumbai.

Mr. Guha said the government should budget as much as $35 billion to strengthen banks’ balance sheets. If it doesn’t, bank lending growth is likely to drop further, he said.

There is also widespread doubt about whether the big infrastructure projects at the center of the debt mess will ever earn enough for their builders to be able to repay their loans.

“People like to believe that once they come on stream, all our problems are solved. I’m questioning that logic,” said Ananda Bhoumik, managing director at India Ratings, Fitch Ratings’ India subsidiary.

Another side effect of the banks’ bad-loan problem is that lenders are resistant to cutting interest rates, preferring to keep rates high so they can get bigger returns on loans despite easing steps by the central bank.

“Banks are trying to make up with their interest margins the losses they’re experiencing on their asset quality,” said Sonal Varma of Nomura.

This has helped keep the potential stimulatory effect of 0.75 percentage point in central-bank rate cuts this year from percolating through the economy.

Privately owned banks, which have bet on retail loans and enacted more aggressive recovery practices, are doing better.

HDFC Bank Ltd., a large nonstate bank, said bad loans on its books declined to 0.95% in the quarter ended June 30 from 1.07% a year earlier.

Private banks benefit from higher exposure to retail customers, a strategy that has allowed them to spread the risk on small accounts as demand for house and car loans soars.

“We are seeing a stabilization of the formation of” nonperforming assets, said Chanda Kochhar, chief executive of ICICI Bank
IBN

-3.09
%

Ltd., the country’s largest nonstate lender. “The overall asset quality for banks depends on how the economy moves. With the economy getting better, we hope the stability should continue.”

Shefali Anand contributed to this article.

Write to Gabriele Parussini at gabriele.parussini@wsj.com

Economic Growth in Asia Threatens Environment

  • MP3 – 128.0kb/s – 3.4MB
  • MP3 – 64.0kb/s – 1.7MB

Strong economic growth in Asia has lifted millions of people out of poor economic conditions. But some environmental activists say it has also hurt the areas environment. The International Union for Conservation of Nature met in Bangkok, Thailand recently for three days. The group urged Asian countries to work together to protect the environment. It warned that, if they fail to do so, many plants and animals will become extinct.

Asia produces about 40 percent of global economic activity and two thirds of global growth. About 60 percent of the worlds population lives in Asia. Experts predict 3.3 billion people will live in Asian cities by 2050. About 1.9 billion live in the urban areas of Asia now.

Asias economic development has hurt its environment. Experts say more than 1,400 plants and animals in the area are critically endangered. In other words, they could soon no longer exist. About 95 per cent of Southeast Asias coral reefs are at risk. And, wetlands that once covered tens of thousands of kilometers of shorelines are disappearing faster in Asia than anywhere else in the world.

Zhang Xinsheng is president of the International Union for Conservation of Nature. He says the planets ecosystems are stressed and need new efforts by governments to limit losses.

Can we (be) sustainable with this production pattern? Can we sustain with this consumption? So now it needs political will; it needs general awareness, but it needs also (a) change of values. We must review, we must reflect, we have to change the production pattern, we have to change the consumption model, we have to build inclusive societies.

At the end of its meeting in Bangkok, the group urged governments, businesses and non-government groups to work together to help the environment.

Yeshey Dorji is the Minister for Agriculture and Forests in Bhutan. He says it will not be easy to convince people to consider the long-term effects of their actions on the planet.

Its mainly the people going for short-term economic gains, he says. I think that is the biggest challenge for conservation, like poaching, illegal trade — this is for short-term economic gains which are actually the main driving force.

Officials with the International Union for Conservation of Nature say 2015 is a turning point for Asia. The Asia Regional director of the IUCN, Aban Marker Kabraji, says an urgent effort is needed. He says Asian countries need to take the energy that fueled 50 years of economic growth and use it to secure the well-being of both nature and humans.

Im Jonathan Evans.

Correspondent Ron Corben reported this story from Bangkok. Christopher Jones-Cruise adapted it for VOA Learning English. Mario Ritter was the editor.

US Lacks Ammo for Next Economic Crisis

As the US economic expansion ages and clouds gather overseas, policy makers worry about recession. Their concern isn’t that a downturn is imminent but whether they will have firepower to fight back when one does arrive.

Money has been Washington’s primary weapon in the decades since British economist John Maynard Keynes proposed aggressive government spending to battle the Great Depression. The US generally injects cash into the…

Rampell: We should just double our economic growth!

Forget Jeb Bushs bold promise of 4 percent economic growth, which Chris Christie subsequently matched. Never mind Scott Walkers attempt to one-up them both, with a pledge of (wait for it) 4.5 percent growth. And ignore Mike Huckabees slightly higher ambition, recently offered in Iowa, of a whopping 6 percent growth.

U of A economic study shows affects of climate change worldwide

TUCSON, AZ (Tucson News Now) –

A new study outof the University of Arizona shows the positive and negative impacts of climate change on nationaleconomies across the globe.Derek Lemoine, an assistant professor of economics at the University of Arizonas Eller College of Management teamed up withSarah Kapnick, a physical research scientist for the National Oceanic and Atmospheric Administration at the Geophysical Fluid Dynamics Laboratory to study how climate change in the short-terminfluences economic growth.

The study title A Top-Down Approach to Projecting Market Impacts of Climate Change found (1) nearer-term climate change could raise the average rate of economic growth in more affluent countries, while reducing the growth rate in poorer countries, plus(2) when climate change makes weather in regions across the globe more variable, the variability of economic growth also increases according to Amanda Ballard at UANews.

The image below shows thecontrast of economic growth. Countries highlighted in pink and red show increased economic growth, while countries highlighted in blue are negatively economically impacted.

Click here of the complete UANews story.

Copyright 2015Tucson News Now. All rights reserved.

When gibberish overwhelms an economic debate

Mr. Huckabee, the winner of the 2008 Iowa caucuses, who is running as an economic populist, said 6 percent growth or more notably upping the ante over Jeb Bushs promise of 4 percent growth would be possible through what he calls the Fair Tax, a type of national sales tax. Economists have expressed skepticism at Mr. Bushs promise of 4 percent growth, so Mr. Huckabees 6 percent plan may cause even more raised eyebrows.