Indian economy better placed than China’s, says Roach

Stephen S Roach, chairman of Morgan Stanley Asia, expressed his optimism on the prospects for the Indian economy over that of China, saying that India has made a lot of improvement in recent years on the macro developments, especially with an increase in foreign direct investments, higher savings and improvement in infrastructure in the share of India in GDP.

“These improvements reinforce the long-standing accomplishments of India on the micro front—large collection of world-class competitive companies, well educated IT competent workforce, extraordinary entrepreneurs and innovators, well developed capital market, solid financial institutions, rule of law and democracy,” said Roach in a press conference, adding that what has been missing in this interplay between the micro and now the improved macro has been the political impetus to reforms, something it has hobbled your government in the last five years.

“India is a more balanced economy than the rest of export-led Asia,” Roach told reporters in Mumbai on Wednesday. In fact, for the first time, Roach is now more optimistic about prospects for India than China. “China faces major challenges for the first time in 30 years,” Roach said. “It pushed its export-led model too far, leaving it too dependent on the external climate.”

Roach noted that the recent election changes the prospects for reforms going forward and hopes that the new Congress-led government will be more effective in pushing the reforms forward on a number of fronts and will be much less hobbled by the politics of coalition management.

Talking about the growth forecast for the Indian economy, Roach said the growth would remain between 5.5-6.5% for now. Incidentally, Morgan Stanley on May 28 raised India’s growth forecast to 5.8% in the fiscal year to March 31, 2010, from an earlier estimate of 4.4%. The economic growth in the $1.2 trillion economy may turn out to be the real surprise in Asia, Roach said.

“The growth in the Indian economy cannot go beyond 8% in another 2-3 years time,” he said. Roach also noted that disinvestment is important for India to reduce its fiscal deficit.The fiscal deficit of India widened to a seven-year high of 6.2% in the fiscal to March 31 as government borrowed more to fund fiscal stimulus packages.
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Oil Prices: Are we at a multi-decade bottom?

Oil has been one of the predominant stories for 2008. Characterizing the first half with its meteoric rise and capturing the second with a spectacular free fall, market chatter has swung from talk of $150 per barrel of crude to $35 per barrel in the span of a few months.

As with any commodity, the price of oil is decided by demand and supply. In the past few years, while on the demand side North America remained one of the largest consumers, incremental growth in demand has come from China, West Asia, India and countries of the former Soviet Union. Oil demand from the Organisation for Economic Cooperation and Development nations has registered tepid growth since 2000 and their share has fallen by almost 5%.
In the first half of 2008, demand for India and China was forecast to grow by around 10%. The high estimates argued that these countries would exhibit price inelasticity in their blistering path of growth, leading to fears of spare capacity exhaustion. Spare capacity as a percentage of demand has been coming off its peak of 14% in 1987 to an anaemic 3% in 2007. Hoarding by select nations added to the general level of panic, causing markets to bid oil contracts higher.
Through the summer the US saw a decline in demand—highway miles driven fell for the first time in 29 years, toll booth receipts dropped and several airlines grounded fleets. With the biggest consumer weaning off its addiction, oil started faltering. The final blow was dealt with worse-than-expected numbers coming out of China. While part of the price decline was funds flowing out of the commodity spectrum and the US dollar strengthening in a recessionary environment—in line with prior recessions—the crux of the matter is a fixation with the near-term demand.
In earlier recessions, developed nations would largely contribute to the growth in oil demand at the cusp of a recovery. However, over time, developed nations have lost share to emerging nations and hence any recovery in oil demand will now be led by these countries.
Estimates assume acceleration in demand growth in the second half of 2009. That might prove overly optimistic, with China’s economic growth undoubtedly set to slow further.
China’s reliance on exports and any prosperity thereof feeds into oil consumption.
Exports to developed countries have dramatically slowed and are hardly a self-starter in light of the severe downturns in these countries. While internal domestic growth could be a driver, we have severe doubts about China’s announced fiscal pump-priming.
Incremental demand was also registered from West Asia. With large infrastructure and development projects being rolled out, these cash-rich nations were once touted as self-sustaining and hence consumption-based economies. But as this levered story came unhinged, any incremental demand in oil from these nations is now suspect.
While in the near term the pull back in consumption is more than certain, we believe this will lead to an overcorrection in the price of oil.
The Organization of Petroleum Exporting Countries (Opec) faces one of the largest drops in global oil demand since the 1980s and will aggressively cut production. As demand overcorrects, so will supply.
A pull back in the price of oil will also put new projects on hold as it is no longer as profitable to spend capital in generating a commodity that can’t seem to bottom.
New expensive upstream projects such as oil sands and deep-water exploration will likely be delayed, thereby postponing any incremental supply additions.
Turning to existing supply, the picture is bleak. Mature oil fields are seeing accelerating decline rates, and outside of Opec, the supply is characterized mainly by mature fields. New discoveries are yielding much smaller fields, not to mention some fields trapped in geopolitical strife.
All this will eventually contribute in setting a floor to the price of oil. Additionally, China has pledged to build strategic reserves to service 180 days, demand over the next decade. As oil gets cheaper, nations will strengthen their strategic reserves, bringing natural buyers to the market.
The world will be weaned off oil only in the face of a major technological shift towards, say, battery cars or biofuels, or an increase in supply. However, the former will take a long time to become mainstream and the latter is highly unlikely.
Although oil prices have plummeted, the prospect of an economic recovery at some point in the future isn’t unreasonable. Neither is it unreasonable to consider the pressures of rising population on a shrinking natural resource.
As oil pulls back, we are likely sitting on a multi-decade bottom.

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China moves to boost economy

China launched a huge stimulus plan on Sunday worth nearly $600 billion, kicking off what could be a round of big spending or interest rate cuts by leading economies to stave off a recession in many countries.

In Brazil, finance ministers and central bank governors representing 90 percent of the world's economy said they would take "all necessary measures" to get financial markets back to normal and counter the backlash of the credit crisis.

Many developed economies are now facing a contraction next year after lending from banks suddenly dried up, and newer powers such as China have been caught up in the domino effect.

World leaders meet next weekend to discuss precisely what measures they need to work out in coming months, and how much more say emerging economies will have over global finance.

China's official Xinhua news agency said the world's fourth-largest economy approved 4 trillion yuan ($586 billion) in new government spending between now and 2010, focused largely on infrastructure and social projects.

The move was hailed by the head of the International Monetary Fund, Dominique Strauss-Kahn, who said it would have a positive effect on the world economy.

China's cabinet also announced a shift to a "moderately easy" monetary policy, suggesting more rate cuts.

"'Easy' monetary policy could mean, quantitatively speaking, more money supply and a looser market liquidity," the head of China's central bank, Zhou Xiaochuan, told reporters in Brazil. "It can also be reflected in prices, for example the bank lending interest rate could become lower."

China has cut rate cuts three times since mid-September.

"This is pretty major," said Arthur Kroeber, head of Dragonomics, a Beijing economic consultant. "It reflects the official view of how serious this problem is and shows that this is a government that can mobilize enormous resources to stimulate the economy when they put their minds to it."

By comparison, the United States sent out about $100 billion in tax rebate checks this summer, while Germany last week agreed to a 50 billion euro pump-priming plan.

China's Xiaochuan, attending the meetings in Brazil, said on Saturday the Asian export powerhouse, which is one of the few remaining engines of global growth, expected growth of between 8 percent and 9 percent in 2009.

Some economists have predicted growth in China could slow to less than 8 percent in 2009, down from double-digit levels in the past five years until this year.

Also on Sunday, Taiwan's central bank unexpectedly cut interest rates by 25 basis points, its fourth reduction in just over a month on recession fears for its export-led economy.

In the United States, which is heading for a bleak 2009, senior aides to President-elect Barack Obama said the crisis would not stop him from expanding health care, overhauling education and energy policy, and passing a middle-class tax cut soon after he takes office in January.

Need for coordinated action to deal with crisis

In Brazil, ministers and central bankers promised they would "urgently take forward" proposals put up by leaders at next week's summit in Washington, D.C., although there was little concrete action agreed to at their meeting in Sao Paulo.

"There is consensus that we need coordinated action to deal with the crisis," Brazilian Finance Minister Guido Mantega told reporters after an annual meeting of the G20 group of advanced and big emerging economies, which was dominated by the crisis.

"It requires global action and so there is a need for institutions that are suitable for this kind of common and coordinated action. This has not yet been resolved but the G20 is a strong candidate to be the coordinator."

Brazil and other emerging economies have demanded more of a voice in management of global finance that remains the preserve of rich countries, which are members of the G7 group.

South African Finance Minister Trevor Manuel told reporters the G7 can no longer be "a little club on its own."

In a communique, the G20 said it saw the need for comprehensive reform of the Bretton Woods institutions, such as the IMF and the World Bank, "so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges."

In a sign of possible future wrangling over how much real power would be ceded to developing countries, Canada's central bank governor said the G7 remained effective.

The G20 declaration also called for regulation or oversight of all sectors of the financial industry, "as appropriate," language that appeared to reflect differences between countries over how sectors such as hedge funds should be treated.

In Europe, the main stimulus for growth would come from interest rate cuts, French Finance Minister Christine Lagarde said, reiterating her previous comments that a new European Central Bank rate cut was possible "in the next few weeks."

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How China could wreck the US economy

The recent bailout package being approved in the US Congress needs to be viewed in the context of the spurt in the accumulation of forex reserves of China by about $500 billion in the last six months to about $2 trillion in aggregate.
This gargantuan build-up of forex reserves by China has strangely received very little attention of economists, policy analysts, currency traders and, of course, geo-strategists around the world.
Why is China engaged in this exercise? What could be its implications on the on going global financial crisis? Could China trip the bailout package announced by the US last week? Crucially what are the implications for the existing global order?
What is intriguing in the Chinese forex reserve build-up is that both trade surplus and foreign direct investment account only for a part of this gargantuan pile. After adjusting for all known sources of reserve accretion, experts conclude that approximately an excess of $200 billion could have flown into China as 'hot money' -- read inexplicable flow of funds -- in this period.
The Economist -- in one of its issue in recent months -- quotes Michael Pettis, an economist working in China, who explains how and why hot money flows into China. According to Pettis, hot money comes into China when companies overstate FDI and over-invoice exports.
But where is such money getting parked in China? The Chinese stock market, like many of its counter parts across the globe, continues to plunge. Hence, it may not be an attractive destination for hot money. Some experts suggest that it could have gone into property while the predominant view is that it could simply be the Chinese banks that offer interest rates in excess of 4 per cent on yuan deposits compared with a lower rate on dollars.
How a 2 per cent interest rate differential results in such cross-border flow of capital requires some explanation. What makes the dollar-yuan exchange rates central to any discussion on global finance is the fact that trade between the United States and China has burgeoned in the past decade or so. But this is not a two-way trade as would be commonly believed. Most of this is unilateral -- i.e. exports from China to the US.
In fact, this is the fundamental reason for the burgeoning current account surplus that in turn translates into China's forex reserves. In the process, over the years, the US has become extremely dependent on China not only for supplying cheap goods but also for the Chinese to fund such imports by parking their forex surplus within the US.
This twin-dependency on the Chinese for goods and money to finance its deficits has always engaged the attention of the US policy framers who till recently were not at all comfortable with this arrangement. And now added to this is the latest aggressive build-up of forex reserves by China surely has the Americans in a bind.
The economics behind Chinese yuan
Economists in the US till recently believed that a weak yuan implicitly subsidises the Chinese exports leading to such huge trade imbalances between the two countries. Consequently, they have been pointing out to the imperative need for a substantial appreciation of the yuan by a minimum of 20-25 per cent vis-a-vis the US dollar to remedy the situation. In the alternative they have suggested a countervailing duty of a similar scale on imports from China.
Further, economists are of the opinion that by constant intervention in the forex market not only does the Chinese Central Bank ensure a weak yuan it also causes competitive devaluation of various currencies in Asia.
The net consequence is a domino effect with the result that the US dollar is artificially valued at higher-level vis-a-vis most Asian currencies. Experts believe that a significant yuan revaluation will ensure a more realistic exchange rate mechanism in Asia as it could force other countries to follow suit.
It is in this connection that C Fred Bergsten of the Peterson Institute, in a testimony before the hearing on the Treasury Department's Report to Congress on International Economic and Exchange Rate Policy in early 2007, states: "By keeping its own currency undervalued, China has also deterred a number of other Asian countries from letting their currencies rise very much against the for fear of losing competitive position against China."
Naturally, in anticipation of a significant revaluation of the yuan, most experts believe given the uncertainty associated with the global financial markets that hot money is flowing to a relatively safe destination. After all, China not only offers higher return but also is virtually insured against any downward movement against the US dollar.
In effect, is this hot money flowing into China in anticipation of this revaluation of the yuan? Or is it a simple case of China maintaining trade competitiveness through a weak yuan? Or is there something more to it than meets the eye? Are the Chinese acquiring the dollars with some sinister motive? In effect, has the Chinese strategy of a weak currency over the years the un-stated policy of dynamiting the American economy?
Mutually Assured Destruction (MAD)
What is worrying the Americans is that China accounts for about one-fourth of the global forex surpluses and are the counterparts of the US current account deficit. Put simply, while China accumulates forex reserves, the US accumulates a corresponding debt. And the Americans are aware that it is the Chinese are the biggest accumulators of the US treasury bonds.
What is indeed intriguing is that a country -- the US -- that prides on being 'independent' of other countries, especially in security affairs, is now caught in a quagmire as it has to be constantly in the good books of the Chinese government if it wants to avoid a sudden shock.
Countries that hold large US dollar denominated forex reserves have a powerful tool in their arsenal -- they could wreck American financial markets at a mere click of a mouse by selling their dollar holdings. Imagine China with a holding nearly $2 trillion worth of treasury bonds seceding to sell the same overnight.
And that could instantaneously dynamite the global financial system as it could suck out liquidity and cause interest rates to shoot through the roof. Remember, the $700 billion package announced last week by the US is precisely aimed at addressing the liquidity crunch within the US.
China, of course, might have no sinister intent, as this would be at a huge cost. But the Chinese know that no country can ever become a global superpower without a cost. As and when the Chinese decide to take a hit on their dollar holdings, global finance could indeed take a roller coaster ride.
Obviously, the Americans' borrowing from China and the Chinese supply of money to the US is indeed an intriguing geo-political game. Surely, this cannot be simple economics by any stretch of imagination.
Given this paradigm, till date experts opine that both are locked in a tight bear hug. According to Lawrence Summers, 'It is a new form of mutually assured destruction that has quietly emerged over the last few years. This implies that China needs the US (for its exports and to park its forex reserves) as much as the US needs China (for imports and borrowings).
So have the Americans played into the hands of Chinese?
Recent events in the US have turned this 'MAD paradigm' upside down. It is in this context that the recent bailout package needs to be viewed, which seeks to increase liquidity over a period of time by the US government taking over sub-prime assets from financial institutions. That, according to the American thinking, is expected to provide liquidity to the US economy.
But it is all these happenings within the US that makes this accumulation of forex reserves by China extremely interesting. It may be noted that the Chinese, unlike the others, have always questioned the global order with the US at the helm of affairs. And the Chinese accumulation of forex reserves is surely a strategy that perhaps has an ominous side to it.
All this is not pure economics as it is made out to be. Rather, it was and remains a well-planned economic, political and military strategy of the Chinese. And in a way it is the mirror image of the Star Wars programme that the then US President Reagan unleashed on the erstwhile USSR in the early eighties that eventually bankrupted the later within a few years as it engaged in competitive arms build-up with the former.
Statecraft is all about engaging other countries at one's own terms, pace, time and cost. This is what the US did to the USSR in the eighties and succeeded in dynamiting that country. And that is what China could do to a vulnerable US in the coming months. Crucially, if it doesn't, from the Chinese perspective it might well rue this moment forever.
The US till date was depending on the Chinese for imports and to finance them as well for such imports. Now they will have to be considerably dependent on the Chinese to protect their currency as well as to ensure liquidity in their money markets. And that completely alters the existing global order.
1 Chinese yuan = Rs 6.9160

1 US dollar = yuan 6.8527

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After the Games, China's economy faces big hurdles

By Simon Rabinovitch
BEIJING (Reuters) - For China's policy makers the race has only just begun to prevent the world's fourth largest economy from slowing too sharply after the end of the Olympics.
In recent days, the government has unveiled steps to help small firms and raised tariffs for power generators, encouraging them to boost output and so ease crippling electricity shortages.
That followed a relaxation of caps on bank lending and new tax breaks for textile exporters, which have been hard hit by rising costs and weakening demand.
"Post-Olympics China is slowing, not because the Olympics are over, but because of global forces," said Don Straszheim, vice-chairman of Roth Capital in Los Angeles.
"China's macro statistics are going to look terrible the rest of this year and into 2009. China wants to act, and supporting the growth rate is going to be overwhelmingly the top policy priority," Straszheim said in a note to clients.
JPMorgan Chase told clients that the government was studying a fiscal stimulus package worth 200-400 billion yuan ($29-59 billion).
A burst of public works spending would reduce China's reliance on exports -- a source of friction with its trading partners -- and address China's fundamental needs.
While Beijing's new stadiums have dazzled Olympic visitors, China's vast interior is crying out for modern housing and clean drinking water; its fast-growing cities need much better public transport and less-polluted air. The nation's rail network is overburdened and its power grid is inadequate.Continued.......