World
China’s slowdown: Why the analysts keep getting it wrong

The irony is that capitalist analysts’ and economists’ predictions rely so much on government policy rather than the market forces and not just in China

 
The growth of the Chinese economy decreased this quarter as it has since the beginning of 2010. It is also much slower than the average growth for the past decade and the downward trend is pretty consistent. But that does not seem to matter. Most analysts mistakenly predicted that China’s economy would start to accelerate in the second or third quarter of this year. They were wrong. Now the vast majority of them again believe that the Chinese economy is about to bottom in the third quarter and resume growth. This is despite indicators like electricity usage growth. This has been steadily declining since the middle of 2011. It is also running at roughly half the average rate of the last five years. The real question is why are these analysts so optimistic despite the fact that they have been consistently wrong? The reason is that they have enormous faith in the Chinese government.
 
Their faith seems to have a good foundation. The Chinese technocrats engineered the fastest development of a country in history. China’s economy has grown from one of the smallest in the world to the second largest. When the economies of more developed countries collapsed in 2008, China was able flood its economy with stimulus and rebound at a breath-taking rate which was the envy of the world. 
 
China has been able to create this environment with state control of large segments of the economy. In a recession, they do not have to encourage banks to make loans to businesses to get the economy going as they do in the US or Europe. The government simply commands state-owned banks to make loans set by quota. It doesn’t stop there. The central government can command the local governments to finance infrastructure projects with these loans to create demand and jobs. It also can command state-owned companies to make investments to create more growth and more jobs. So China can prevent recessions, right? Wrong.
 
China’s economic miracle has been based on private enterprise not state ownership. For more than two decades the Chinese have loosened controls over various sectors of their economy. This does not mean that they have encouraged it. Quite the contrary, they have spent far more time and money nursing inefficient state firms. But once you start to loosen some controls, institutions and markets can start to act in ways that are not intended. The central government’s control of the economy is not what it once was.
 
For example look at the state-owned banks. Their loans prevented a collapse in 2009, but at a cost. They lent money according to commands, not necessarily to borrowers who could pay them back. The result has been the growth of bad loans. So now with the Chinese economy slowing they have been less willing to open the coffers. In July the Chinese central bank told the banks to lend at 30% discounts to the large state-owned companies. But this time the banks have been resisting. For good reason. Chinese corporate profits show no signs of recovery and estimates have been cut by the most since 2009. Bad loans in some banks in Wenzhou are reported to be at 3% and could be as high as 7%. 
 
Loans to local governments are also in question. Local governments get most of their revenues from land sales. To stem a housing bubble, the central government placed restrictions on these sales. As their finances deteriorated, the locals started to ignore these commands. Land sales are supposed to pick up, but during the recent holidays, a time for real estate sales, the housing market suffered a 70% decline from last year.
 
To read the illusion of China’s stimulus, click here
 
Banks have more reason to worry about their loan portfolios. They now have more competition for depositors. Bad loans can no longer be written off from profits made by suppressing the amount of interest paid to depositors. Profit growth at banks has slowed to 6% from over 20% at the beginning of the year.
 
It is not just the financial system that has to adapt to the increased liberalization. Increased travel and international trade means that more Chinese can vote with their capital and their feet. Money has been leaving China as never before. At the height of the financial crises about $110 billion left the country in the 12 months prior to March 2009. According to the latest figures about $225 billion left last year. So many Chinese, specifically communist party officials, have followed the cash that the Communist Party has set up a special Command Group to Fight against Communist officials and government employees fleeing the country.
 
The irony is that capitalist analysts’ and economists’ predictions rely so much on government policy rather than the market forces and not just in China. They should instead take heed of the biblical dictum: trust not in princes.
 
To read more articles from the same writer, click here.
 
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at william@emergingmarketstrategies.com or w.gamble@alrroya.com.)
 

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Air Kerala: Vishu-ful planning!

Air Kerala, a state government promoted venture, is set to become a reality in April next year. It remains to be seen how the Directorate General of Civil Aviation reacts to offer Air Kerala a license to fly first, after which the five-year mandatory rule will have to be overcome to enable it to fly overseas

Conceived in 2004 by Oommen Chandy, salted away in 2006, Air Kerala has now been revived after he became chief minister, and is set to fly on 14 April 2013.  It is a not wishful thinking of a Keralite but a Vishu undertaking, determined to settle scores with Air India which has been charging high rates on the Gulf sector, affecting the large population of Keralites working in the Middle East. 

 

The Air India drama last week, has now precipitated the resolve and is certain that expeditious moves are afoot to ensure that Air Kerala is a reality that will takes its wings on Vishu day.

 

The unfortunate incident, if the media reports are to be believed, has been blown out of proportion due to inept handling of the irate passengers, who apparently had poor customer service from the very outset. The flight itself was inordinately delayed before it took off from Abu Dhabi. The upset passengers may have had arguments with the cabin crew, who were also subject to insults for no fault of theirs, and, when the commander of the aircraft had sufficient safety concerns to divert the plane, announcements may have been made only just prior to touching down at Thiruvananthapuram. The full story will become known once an internal investigation is carried out and the report is made public.

 

Expressing the right of the state government to establish an airline with 26% holding, with the balance equity being made easily available (or secured) from NRIs working in the Middle East, it will be a cake-walk for Air Kerala to become operative. There are an estimated three million Keralites working in Gulf countries, a large number of them living in this area fore decades now. Almost every single family has at least one or more of the family working in the Middle East.

 

Although there is a general mandatory requirement of five years of successful domestic service before an airline is allowed to “go overseas”, there has been exception to the rules in the case of Air India Express, where this was waived on the pretext of it being a subsidiary of the national carrier—Air India.

 

It remains to be seen how the Directorate General of Civil Aviation (DGCA) reacts to offer Air Kerala’s license to fly first, after which only the five-year mandatory rule will have to be overcome.  Any leniency by DGCA will set a precedent with applications coming in for Dravida Vimanam, Air Deccan or Vayu Karanataka, Andhra Air, Punjab Express, Maratha Speedways and Gujarat Airways.  And, Air India will disintegrate or find itself as a minor working partner with some of these airlines. Consolidation and regrouping of airlines, mergers and acquisitions can be expected in the next 12-18 months at best.

 

There is no doubt that Air India has a strong technical and commercial base.  Why is the government not thinking in terms of selling out the national airline or allow it to branch out, in a manner of spin off, into regional airlines and letting the survival of the fittest?

 

And how will Air Kerala operate? Successfully and profitably because of full occupancy in all flights. The bulk of Air India’s passengers have been Keralites from the Gulf and they will now fly directly from their Middle Eastern locations to main airports in Kerala without having to stop over at Mumbai, Chennai or Bangalore or even Mangalore. 

 

This airline will have all economy seats and the cabin crew will speak Malayalam also; during the holy month of pilgrimage to Sabari Malai, special food will be offered and several flights a day will take care of the rush. Similarly, their Haj flights will strictly adhere to Islamic requirements for making the holy trip a joyful experience.

 

In all cases, food packets will be pre-sold and collected against coupons as you enter the aircraft and drinks will be served once airborne. During the pilgrimage seasons, only soft drinks will be served apart from food requirements.

 

Finally, if the DGCA puts any sort of stumbling blocks due to political pressures, chances are that Air Kerala and other prospective regional airlines will come in via foreign collaborators such as Emirates, Gulf and other airlines operating from the Gulf who have been awaiting such an opportunity to enter the Indian aviation market for a long time.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at anantha_ramdas@yahoo.com.)

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COMMENTS

Dr Anantha K Ramdas

4 years ago

Thank you Mr Dasgupta and Mr Ganesan for commenting on the article on Air Kerala.

Mr Dasgupta: I note you are upset with government spending money on aviation, particularly as the Ministers referred to are from a party who you appear not to like or approve. The writer has no interest in politics involved, but, living as we do in a demoCRAZY, these are the "benefits" that citizens are forced to face.

Aviation is a necessary evil and this is one reason why government at the centre has now permitted FDI in this sector to bring in more facilities.

Sir, it is responsibility of citizens to elect or dislodge a government if they do not serve the promised purpose in their election campaigns, but you must understand this is no kid stuff to write on what an "elected" state official as CM who has revived the idea to improve the lot of his fellow Keralites who work abroad and remit crores of rupees to the state. The prosperity of Kerala today is due to NRIs, which we may bear in mind and little help in their flights back and forth will be appreciated. It is same as improving the bus service from one part of town to another in Kochi or Thiruvananthapuram!



DEBARSHI DASGUPTA

4 years ago

Mr Ramdas,This is an irresponsible and foolish article.Also it is worded like a kid's arguement.
Everyone knows Govt. of Kerala's poor fiscal health.And they dare to burn taxpayers money yet again by playing to the gallery.Not so long Vayalar Ravi from the state and the same party that is in the governement in the state and the centre was the aviation minister.Throwing tax payers money at sectors like aviation is not a good idea.
Also Moneylife editor,
Pls dont publish such foolish artciles.

REPLY

SRINIVASAN GANESAN

In Reply to DEBARSHI DASGUPTA 4 years ago

The article has the primary aim of helping to promote an important requirement of the NRI Kerlaites who slog all the day in Gulf and send money back to Kerala, India. I do see that NRIs feel the need for a good and comfortable connectivity when they visit their home town once in way. I see that this is what Chandy wants to do.
It is important for the local people to elect a proper Government to address their basic needs.
Competition among airlines including Air India will certainly help alleviate the sufferings of the travellers.

I enjoyed reading this article.

M G WARRIER

4 years ago

I spend about six months in a year in Kerala and the remaining six months in Mumbai. The neglect of road and water transport systems in Kerala and the criminal neglect of facilities in suburban locals in Mumbai always leave a lingering pain in my heart. Who will tell the powers that be to divert a small portion of the heavy expenditure being incurred for improving the comforts of the rich class (additional airports, metro rail, super-fast trains which will take one from Kasaragod to Thiruvananthapuram-over 600km- in less than 2 hours and so on in Kerala and Express highways, fly-overs, more facilities for air travel and so on in Mumbai) for reducing the risk to life while traveling in Kerala and Mumbai? (I have in mind the daily deaths and injuries while traveling by road in Kerala and while traveling by suburban locals in Mumbai).

Thank you Nitin Gadkari for disclosing your friendly loans from IRB!

Business houses and politicians have always been bed fellows. They are two sides of corruption at the highest levels as all scams have proved

 
Politicians sometimes almost unwittingly, without realizing, seem to tell the truth! Of course it is in self-defence and certainly without realizing the consequences.
 
I heard Nitin Gadkari, president of Bharatiya Janata Party (BJP) telling Nikhil Wagale on IBN-Lokmat that since his companies’ balance sheets were not fit for any bank to lend him money; he requested his good friend DP Mhaiskar of infamous Ideal Road Builders (IRB) Group to help him out. The IRB Group then raised money on its balance sheet and lent it to Gadkari’s companies at a higher interest rate thus pocketing some profit in the bargain, provided these companies paid IRB or Mhaiskar the interest and the principal amount. This disclosure raises many questions.
 
Who are these banks which lent the money in complete violation of banking regulations? They obviously did no due diligence to find out the end use of loan. I wonder what security has been offered to them and what is its value? Now these banks must be investigated by the Reserve Bank of India (RBI) immediately and appropriate action must be initiated. The confession by Gadkari that such a transaction has taken place is sufficient to initiate action against these banks. 
 
This is a norm and many companies have been doing this. Loans are taken in one company’s name and then that amount is given as loan to a subsidiary with a weak balance sheet. This action of banks proves my belief once again that banks tend to create their own non-performing assets (NPAs).
 
I also wonder why the statutory auditors of IRB do not write any qualifications to their report. I am assuming here that they haven’t as I have not seen the financials. This again is violation of regulations. They also need to be pulled up.
 
This proves once again that Registrar of Companies (ROC) probably does nothing after regulatory filing. Does anyone there scrutinize financial statements at all? Same goes for the Department of Company Affairs (DCA) and Company Law Board (CLB) presumably.
 
And what about the shareholders of IRB? Did they know this at all? What was the “so-called” independent directors’ role in this? Corporate governance? 
 
And how come Kejariwal and his team, after detailed investigation could not find this out? They seem to get government documents at will but how come they missed this. His Indian Revenue Services (IRS) background means he is well-versed with all this.
 
Will RBI, CLB and Securities and Exchange Board of India (SEBI) wake up and take action? From their track record it is most unlikely. Would shareholders, at least the institutional kind and mutual funds (MFs) if they are invested, take this to its logical conclusion? Again not likely by the experience so far.
 
So it is not only that all political parties are hand-in-glove, we all are also responsible. Business houses and politicians have always been bed fellows. They are two sides of corruption at the highest levels as all scams have proved.
 
Any kind of Lokpal will also not be effective in such matters. The regulators have long abandoned their responsibility of regulation and they are responsible the most.
 
We owe a big thank you to Mr Gadkari for this disclosure which he subsequently repeated on NDTV!
 
(Prof Anil Agashe teaches at Symbiosis and other management schools in Pune.)
 

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COMMENTS

ian

4 years ago

As per the above information which is really useful to us to know about corruption which goes raise day by day and politician increase corruption at the highest levels as all scams.
Business houses and politicians have always been bed fellows

Dayananda Kamath k

4 years ago

regarding minsitry of corporate affairs. it is less said better. a complaint with subject " a satyam in nationalised bank" was misinterpretated as claim from investor fund by the undersecretary in the department. a clarification was agains sent and he had the audacity to send the same reply with different reference no. which means whatever the complaint he will treat it as claim from investor education fund. this matter was informed to sri khurshid alam and agains to veerappa moily the minsiters of the dpartment but no action so far. if this is the attitude at the regulator and govt what you can expect.it is conspiracy to loot the public .

Krishnan B S

4 years ago

Coming back to this article, Lot of gaps are there in Nitin Gadkari's case. However when we see an amount of Rs. 60 / 68 crores involved for the same, it is to be fully investigated and the people concerned published.

However, what about Crores being diverted under the table, Gadkari can be asked to resign and his political career shunted like Bangaru Laxman.

I can only see the tail of the elephant being caught, when the full elephant is passing infront of you and nothing is being done.

M K TYAGI

4 years ago

There is all around chaos because whistleblowers are either eliminated or butcherd.

Dr Anantha K Ramdas

4 years ago

Thank you Mrs Shanti Patel for being frank in your comments.

I have a case in point. After getting "SEBI approval" a company goes about getting shares on a "buy-out" plan. Then, quietly, a few months later, has a private equity participation by a third party at a much higher than the buy-out plan. From the balance sheet, I believe a bonus issue follows. The shareholders who did not sell their shares to the company do get their dividends, and of course, the shares are not listed.

Can you comment on this sort of situation as what is to be done by the shareholders? My attempts have been in vain and I have means of knowing what is the current sharevalue, as there is "no market" to know. Yet, a broker keeps sending notices of his willingness to pay cash and buy the very shares!

What should shareholders do?

REPLY

R Balakrishnan

In Reply to Dr Anantha K Ramdas 4 years ago

The best solution a shareholder has is to vote with his feet. Sell the shares of such companies ( I will not go in to whether one should have invested at all).

shanti Patel

In Reply to Dr Anantha K Ramdas 4 years ago

Dear Dr. Ramdas,
Please give me the details about such company. I am a member of managing committee of Bombay Shareholders" Association.
We will look in to the matter and take appropriate action.
Give me your mobile no./Email Id.
If we follow the matter,we get success. It is a matter of time because we do not like CHANGE!
Mrs. Sucheta Dalal should form a committee of members consisting professionals such as Chartered Accountants, Lawyers and retired Honest Government Officers such as Ex.Commissioner of Police Mr. Ribero.
s.k.patel
Chartered Account
skpatel55555@gamil.com

Babubhai Vaghela

In Reply to Dr Anantha K Ramdas 4 years ago

While individual minority shareholders do try in AGMs and through SEBI or MCA but not succeed much as Brute Majority Overpowers the minority shareholder. However, CLASS ACTION is one way for minority shareholders to take decisive action but so far not in practice in India. That can help curb Corporate Frauds.

shanti Patel

4 years ago

Well done Mr.Aghashe,

The Auditors of Companies have to Annexure a statement on matters specified in paragraphs 4 and 5 of the Companies (Auditor"s Report) order 2003(CARO)issued by the Central Government in terms of Section 227(4A).
One of the matters is-Whether in the opinion of the Auditor and according to the information and explanations given, the terms loans have been applied for the purposes for which they were obtained?
If the statement of Mr.Gadkari is what is stated above, the Auditor has to QUALIFY his audit report and report the matter in his report.If not, the auditor has failed in his duty and may be held held guilty in disciplinary action.
In our country CHLTA HAY attitude is very common. No-body wants to come forward to take action!
I fought against a very well known audit firm, having audits of TATA GROUP companies for last three years.Pursued the matter very vigorously and ultimately they have to resigned from Tata Chemicals Ltd., Indian Hotels Ltd., Tata Global beverages Ltd., Nelco Ltd.Whipro Ltd.But you have to give time,energy and money for a long battle to fight.
I request Mrs.SUCHETA DALAL,who has expose large number of corporate frauds in the past,should also devote time and expose such Audit Firms and Directors and specially Independent Directors who do nothing except collect sitting fees and commission at the expense of shareholders.
Shanti Patel
Chartered Accountant
skpatel55555@gmail.com

REPLY

Anil Agashe

In Reply to shanti Patel 4 years ago

Thanks a lot.

Vaibhav Dhoka

4 years ago

All public figures as well as regulators behave as three monkeys of our Mahatma.
1-Bura Mat Dekho
2_Bura Mat Suno
3-Bura Mat Bolo.
Meaning all are mute spectactors.

Babubhai Vaghela

4 years ago

I appealed Prime Minister Dr Manmohan Singh for investigation into Loan of Rs 1100 Crores by RPL to Reema. https://t.co/86ovWugU
There has been no response.

NKPadhi

4 years ago

Who will protect the interest of the investors when everybody, who is in charge of protecting public interest, do not see the obvious ! One feels helpless

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