Investor Issues
Doing business in China: The pros and cons

The regulatory framework in emerging markets is either bad or nonexistent. In the World Bank’s annual report on the ease of doing business the highest BRIC is China which barely makes it into the top half of countries. Brazil is the only BRIC that makes it into the top half of Transparency International’s corruption index

We often expect leaders, professionals, and experts to know and understand the facts. The truth as to what is and what isn’t. Otherwise how could we expect them to make wise decisions? It is then both disturbing and profoundly unsettling to realize that they just accept the most common of assumptions as reality without question.
For example, Muhtar Kent, Coke’s chief executive spoke to the Financial Times about China. According to the article Mr Kent said that said “in many respects” it was easier doing business in China, which he likened to a well-managed company. “You have a one-stop-shop in terms of the Chinese foreign investment agency and local governments are fighting for investment with each other.” Fascinating.
What seems to have escaped Mr Kent is a process known to every con artist. In order to convince your mark to open their wallet, you have to gain their trust. You can do this by letting them win a few hands, by making it easy to play the game or promising large quick rewards. What the mark does not understand is that the game is not being played by the normal rules, but by ones that suit the con artist.
Mr Kent feels certain that Coke will make money in China because it is easy to do business. This has been true. In first half of this year, Coke sold more than one billion cases of its products in China which is double its sales five years ago. From Mr Kent’s perspective this market has great potential. What he seems to have ignored is that it has great risks.
Mr Kent’s entire product rests on a brand. Cola-flavoured sugar water is not hard to imitate. So without protection for his intellectual property his product becomes a commodity and the margins disappear.

In China they pirate intellectual property on a massive scale. Not just high-end Gucci bags, but just about anything that has a brand is being counterfeited. These include Michelin tyres, John Deere combines, Bubble Wrap, Tiffany jewellery, Nike and Timberland footwear, Marlboro cigarettes, Viagra, Colgate toothpaste, Kit Kat chocolates, Tide detergent, GM, Nissan, Ford, Mercedes car parts, mobile telephones, toys, clothing, industrial adhesives and even batteries.

Mr Kent also seems unconcerned about a country that routinely slanders foreign firms. Dell, General Mills, Lipton Teas, Colgate-Palmolive, and Sony all have been targeted. In one case China banned importing foods made by Schweppes, Unilever and Coke itself. These foods were tainted by an ingredient produced by a Chinese company that was only identified by foreigners.

It is not just Mr Kent who is making the mistake, but US Federal Reserve Chairman Ben Bernanke as well. Mr Bernanke suggested that the United States could learn from emerging markets. He pointed out that emerging market growth shows “the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability.” The question is exactly which emerging market did he have in mind?
The regulatory framework in emerging markets is either bad or nonexistent. In the World Bank’s annual report on the ease of doing business the highest BRIC is China which barely makes it into the top half of countries. Brazil is the only BRIC that makes it into the top half of Transparency International’s corruption index.
As to public investment, perhaps only China can be said to make any of those. Brazil has the world’s third-largest road network, but 88% of it is dirt. Traffic is a mess in almost any large city in an emerging market.
As to capital formation and entrepreneurship, senior executives are so unhappy about the Indian government’s painfully slow or inconsistent decision-making that they are focusing their investments on Africa or Latin America. China has consistently starved private firms of capital. Russian prime minister Putin suggested that anyone who starts a new business should be rewarded with a medal for bravery because of their willingness to take on the mass of paper work, poor rules and corrupt bureaucrats.
As to education, India’s vaunted outsourcing industry cannot find enough graduates with sufficient skills. As a percentage of gross domestic product (GDP), China spends less on education than Uganda. The once great Russian education system has been totally corrupted. Anything from school places to university degrees are available for a price.
Both Mr Kent and Mr Bernanke are powerful men. Perhaps what they really admire about some emerging markets is that decisions can be carried out without messy debate. But the point of the debate is to find truth, and that is the one thing that they themselves have ignored. Fortunately for investors, stupidity can be very profitable.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).


2G scam: Hearing on bail pleas of Kanimozhi & others deferred

Deferring their bail pleas, special CBI judge OP Saini said he wanted to complete the process of framing of charges by 15th October after which the bail applications would be taken up

New Delhi: A Delhi court on Saturday deferred the arguments on the bail applications of DMK MP Kanimozhi and Kalaignar TV MD Sharad Kumar, accused in the 2G spectrum case, on their plea that they may be heard after the judge frames charges in the case, reports PTI.

Special Central Bureau of Investigation (CBI) judge OP Saini agreed to their plea and said the arguments on their bail applications can be heard on 17th October as it may frame charges against the accused by that time.

"I want to complete the process of framing of charges in the case by 15th October. Fix the bail pleas of these two (Ms Kanimozhi and Sharad Kumar) for 17th October," the judge said.

Senior advocates Sushil Kumar and Altaf Ahmed, appearing for Ms Kanimozhi and Sharad Kumar, apprised the judge that they are bound to obey the order of the apex court which, while dismissing their bail pleas on 20th June, had said that such applications could be taken up only after charges are framed in the case.

"The order of the Supreme Court was made on the bail pleas of Ms Kanimozhi and Sharad Kumar and we are bound to obey it," senior counsel Mr Ahmed said.

The court also deferred the arguments on the bail pleas of five other accused by 3rd October.

The court fixed for 3rd October the bail pleas of A Raja's former private secretary RK Chandolia, Swan Telecom promoter Shahid Usman Balwa, directors of Kusegaon Fruits and Vegetables Asif Balwa and Rajiv Agarwal and director of Cineyug Films Karim Morani.
Counsel for Shahid Balwa and others pressed that the bail plea of their clients should be heard on Monday, saying the apex court had passed that order on the bail pleas of Ms Kanimozhi and Sharad Kumar and not on their clients' applications.

Counsels Sushil Kumar and Aftab Ahmed said the court may hear on Monday the bail pleas of five other accused.

"You (court) can segregate us from them (other accused) and can take their bail pleas on Monday. We will argue on Ms Kanimozhi and Sharad Kumar's bail on 17th October," the defence counsel said.

The CBI, however, on Friday had opposed the bail pleas of the seven accused in the case on the ground that as per the Supreme Court order, their bail pleas could be entertained only after the framing of charges.

The daughter of DMK chief M Karunanidhi is lodged in Tihar Jail since 20th May for her alleged role in the 2G scam.

Ms Kanimozhi along with Sharad Kumar had moved court for bail for the second time on 16th September.

Opposing the plea of Ms Kanimozhi, the agency in its reply had said that she was the 'active brain' behind the operations of Kalaignar TV in which she also held a 20% stake.

Initially, she was also a director of the channel and had a role in're-appointment' of A Raja as telecom minister.

"Ms Kanimozhi was a stakeholder of Kalaignar TV Pvt Ltd to the tune of 20% equity and was an active brain behind its operations. She was also widely covered by Kalaignar Seithigal (News) Channel," CBI said.

CBI, which opposed the plea of six others, however, said the "court may take an appropriate view as per law" while considering the health condition of Karim Morani.


Bulls defend 4,720 but fail to take out 5,169 points, which means uncertainty continues

The bulls have to defend the recent low of 4,720 points to keep their hopes alive. On the other hand, only a crossing of the recent high of 5,169 points will indicate that there is still some steam left in the current rise for the months ahead

S&P Nifty close: 4,943.25

Market trend
SHORT term: Down        MEDIUM term: Down        LONG term: Sideways

The Nifty opened a tad lower and dipped on the first day of the week, and contrary to general consensus, ended the F&O settlement enquiry on a firm note. During the week, the Nifty hit a high of 5,034 points (R1 was 5,080 points) after recovering sharply from a low of 4,758 points (S1 was 4,742 points), but still fell miserably short of coming near the last few weeks' top of 5,169 points. Volatility was high during the week (which was a bit surprising considering that the volatility of the previous 3 weeks was also high) and the failure to take out 5,169 points leaves the situation fluid. The only promising aspect of last week was the Nifty surviving the recent low of 4,720 points. Volumes were flat as the Nifty closed 76 points (+1.55%) in the green. The sectoral indices which outperformed were BSE IT (+5.81%), BSE Teck (+4.32%), BSE Oil & Gas (+2.80%), BSE Realty (+2.29%) and BSE FCMG (+2.06%) while the ones which underperformed were BSE Metal (-4.50%), BSE CDS (-4.32%) and BSE CGS (-3.77%).  

The Histogram MACD continues to be below the median line implying that the medium term trend is firmly down and what we are witnessing is a corrective rise. As mentioned above, the positive from last week was the Nifty surviving above the recent low of 4,720 points-and the negative was it was not able to cross the recent high of 5,169 points, which is imperative for further strength.

Here are some key levels to watch out for this week:

  • As long as the S&P Nifty stays above 4,912 points (pivot) the bears will be under pressure.
  • Support levels in declines are pegged at 4,790 and 4,636 points.
  • Resistance levels on the upside are pegged at 5,167 and 5,294 points.

Some Observations
The bulls did survive a scare last week as they defended the 4,720 points level, ably.
1.    Resistance in any further rise will be provided by the "gap area" between 5,229-5,323 points.
2.    Only a close of the above mentioned "gap area" could lead the foundation of a retracement of the entire fall from 6,338-4,720 points, though no confirmation is available as yet despite the last few weeks of recovery.
3.    If the Nifty fails to hold the recent low of 4,720 points, there will be doubts about the strength of this recovery and the distance it could go.
4.    The Nifty not being able to cross the recent high of 5,169 points will signal that the upside in the market is capped in the 5,350-5,500 range in this corrective rise.
5.    The upside "gap" between 4,879-4,905 points is to be watched closely, as this is the immediate support area. If this is not closed, then it will indicate the earliest sign of the bulls becoming a little stronger.

The bulls have to defend the recent low of 4,720 points to keep their hopes alive. On the other hand, only a crossing of the recent high of 5,169 points will indicate that there is still some steam left in the current rise in the months ahead, while a breach of 4,720 points would make the situation very fluid and will indicate that the upside in the months ahead will be capped in the 5,350-5,500 range. We have seen the bulls survive a scare last week and they have to continue to defend resolutely in the weeks ahead if they have to take the market higher. It's advisable to play stock- and sector-specific moves till the Nifty moves out of this range.

(Vidur Pendharkar works as a Consultant Technical Analyst & Chief Strategist,


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