The bubble you know

A Chinese bubble has been deflated. Too bad it’s the wrong one. The main Shanghai stock market index has fallen 23% from its peak at the beginning of August, reversing half of the run-up that started early in 2009. That’s a welcome correction, but it doesn’t mean a return to normality, or address the bigger bubble round the corner.

Shares were driven up by a belief in China’s recovery – and by a rush of liquidity. The fall occurred because both were gently dampened. Politicians have warned that economic recovery isn’t a done deal. Monetary authorities drained some liquidity from the market, curbed certain kinds of lending and asked banks to show restraint. (via The bubble you know).

Look ma, Green shoots

Look ma, "Green shoots"

The long and short

The US economy is going to take some time to recover – a long time. Green shoots versus Brown Weeds is the kind of empty debate which covers the complete lack of visibility on the probable outcome that economists have.

The Japanese have finally decided to sack the LDP – after more than 50 years. The Japanese do not expect any major recovery or growth to happen for the next few years.

Europe is in the boondocks – and is unlikely to come out out of this soon. Their most feasible European option is a greater role for public sector – which the Europeans seem to have embraced in a bear hug.

The BRICs of global economy

Which leaves the BRIC countries. Russia is too dependent on high raw material prices – which need greater demand from the world economy to make a difference. Russia feeds on high growth rates – but cannot be the reason for growth of the global economy.

Ditto for Brazil. Which leaves the world with India and China. Let us first take the Chinese case first.

How ln can this model work

How ln can this model work

Biting the bullet

Most economists believe that to kill the Beast of Great Recession, the world is left with one, single  magic bullet – China. This being the only bullet in the chamber, makes everyone very nervous, keeps everyone busy, reading Chinese tea leaves with great care.

There is overall consensus that the Chinese growth figures need to be ‘tempered’ – and significantly. The fears seems to be in two areas: –

1. Overstated growth rates.

“The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance,” Marc Faber told CNBC. Combine this with the other preoccupation where “China is desperately trying to figure out how to withdraw its funds from the dollar without driving it down — not an easy feat.”

2. Understated bad loans by banks.

an astonishing $300 billion vanishing act … the amount of bad debt the top three banks offloaded in the early 2000s. Back then, the People’s Bank created four asset management companies to scrub away the dirt from two decades of policy-driven lending. There was a big catch. The AMCs bought the loans for up to 100 per cent of face value, while recoveries were in the 20-30 per cent range. That means the top three lenders’ Rmb1.2 trillion of AMC bonds, which start to mature this year, are likely to be almost worthless. In theory, the Ministry of Finance is ultimately on the hook, but it is unlikely to make good for the banks. The amount due to all three is roughly one-sixth of China’s fiscal revenues for 2008. (from If in doubt, rub it out BY John Foley /  August 29, 2009, 0:03 IST).

Housing makes up roughly a quarter of investment spending, which is in turn 40% of gross domestic product. The differences between China’s big cities make a bubble harder to spot. But record bids for land are cause for concern, as is falling affordability in big cities. Meanwhile, stagnant residential rents suggest speculation, not demand for somewhere to live, is pushing up house prices. A burst real estate bubble could be fiendishly tricky to clear up. While stock markets clear in a day, property gluts can take months – if they clear at all. ( from The bubble you know by John Foley, Septemeber 1st, 2009, 01:33 IST).

Everything is made in China

Everything is made in China

Both these severely strain the economic outlook and the banking sector. This may lead to, what the WSJ.COM says, a situation, where “China in the medium term will face just the overcapacity and bad debt that many observers feared already existed.”

But some of these observations and scare stories are exaggerations – and need to be read with the caveat that the dominant Western media portrays all competitors in a similar manner.

What about the Indian economy

That pretty much leaves India as the sole candidate. India cannot absorb the kind of imports that are required to make a difference to the global economy. Or boost exports to the rest of the world – to create consumer led growth. World Bank estimates are that India will grow faster than China by 2010. So, no go!

A plan for Indian businesses

What this means is that India needs to do: –

1. Not bank on any kind of global recovery soon.

2. And island itself – by ensuring that any kind of global mayhem, counter-party risks do not hit Indian banks, corporates, exporters, et al. This may need some strong alliances on export guarantees and credit enhancement by importers for exports from India.

The Indian Government, may not take any major initiative in this regard, but it is the Indian businessmen, who should and must understand this situation – and take the necessary precautions, actions, insurance, guarantees, due diligence, comfort letters – the entire gamut.

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