Long term investments require one thing, certainty. You are not going to get certainty and you are not going to win a game where your opponent is free to set and change the rules.
All trade, like a good personal relationship, is a matter of reciprocity. The last economic expansion of the prior decade even though successful was not sustainable. Mercantilist policies that limit domestic consumption, protect local markets, subsidize export industries and currency manipulation might be very successful for a while, but they cannot ultimately last, because the benefits are unequal. Eventually one partner will refuse to play.
Although many countries have increased their protectionist policies, China in particular stands out. Its policies might not have been so important when its economy and share of global trade was small. In those days the issues could be ignored. No longer.
In the past the lure of a fast growing economy with the largest consumer market on earth was sufficient to silence critics, but things have changed. China's trading partners have started to complain, loudly.
One of the most recent outbursts came from Jeffrey Immelt, CEO of the American conglomerate GE. In a speech in Rome, Immelt accused China of becoming increasingly protectionist. "I am not sure that in the end they want any of us to win, or any of us to be successful."
Immelt is not alone. Peter Löscher of Siemens and Jürgen Hambrecht of BASF have spoken about China. Formerly, these "foreign friends" kept their counsel. They stayed quiet about the problems and often defended China from overseas critics. The reason is simple. No one would criticize China, because it is often the largest market in the world and companies need it to grow.
But it is not only companies that have problems with China. Usually trade disputes with China are viewed as between China and the US. But recently other countries including Indonesia, Brazil, Thailand, Russia, and Europe have expressed concerns. Last year India filed more trade complaints against China than any other nation. Argentina was involved in spat with China over agricultural exports that originated as reprisal for Argentine anti-dumping measures.
The Chinese themselves have been dismissive. Before the price of gas collapsed, Russian foreign policy was anything but accommodative. The Kremlin felt that they had Europe by the scruff. China feels its markets and place in the world economic order gives it similar privileges. As Vice Premier Wang Qishan said last year, "You are going to invest here anyway."
Not exactly. Some companies may have already concluded that China's business environment is not worth the risk. They are realizing what they should have discovered many years ago. Despite the spin, China is not a market economy. Probably more that 50% of its economy is directly controlled by the government and the government sector is growing not shrinking. The rest is tightly managed through a vast regulatory bureaucracy and the state banks.
Since the state owns the economy and has the power to make laws and policies, why would it create a system that would allow more efficient companies or countries to compete? The barriers in China are just what you would expect. The state has used its power with an excessive bureaucracy, an "undervalued" currency, subsidies for home-grown industry and lack of enforcement of intellectual property rights to protect what it owns. Worse, China uses its security apparatus as a weapon for corporate espionage.
A good example is the case of Google. Google has been the subject not only of censorship of what information it can present; it was also the target of hacking. The hackers, who proved to be from China, were responsible not only for hacking and stealing intellectual property but of trying to hack into the emails of human rights activists. Google of course is not alone. Security has been breached in at least 30 and perhaps as many as a 100 companies.
Certainly it is true that other countries have used subsidies, non tariffs barriers, currency manipulation to further what they consider their national interests. China is not alone in this. The difference is in degree and the incentive to change. Without economic incentives of the state ownership of industries, other governments have to cater to other groups including consumers and voters.
For now China can and will most likely ignore the complaints. It rulers are heavily invested in what they see as a successful policy and see no reason to change. But markets are, if anything, flexible. There are other countries with lower wages. They are building infrastructure and have governments more amendable to changing laws. One country's arrogance is another's opportunity.
Still these multinational companies have only themselves to blame. Long term investments require one thing, certainty. You are not going to get certainty and you are not going to win a game where your opponent is free to set and change the rules. In the end, they will simply have to move on. As one expert said about Google, "If they didn't leave this year, it would have been next year." Immelt was right. Chinese government has no intention of letting it succeed.
The Forward Market Commission’s order banning the sub-broker system in commodity exchanges will hurt MCX the most; panicked sub-brokers of MCX seek respite
Commodities market regulator Forward Market Commission (FMC) today ordered exchanges to bring an end to the sub-broker system; allowing members to service clients only through 'authorised persons'. Exchanges have been directed to amend their bye-laws and ensure smooth transition to the new system within 60 days. This ban against sub-brokers will come at a huge cost to the Multi-Commodity Exchange (MCX), which is the only commodity exchange within the country still operating under the 'sub-broker' system.
MCX currently has around 15,000 sub-brokers under its fold, spread across the length and breadth of the country. What has ticked the MCX off is the fact that FMC has only given a window of 60 days for exchanges to comply with the new regulations. This means that MCX will have to arrange for the necessary documentation and compliance procedure within a matter of two months to enable its intermediaries to function on its behalf as 'authorised persons'.
A source close to the development in MCX told Moneylife, "MCX will be the only exchange adversely affected by the new guidelines. It will be next to impossible to shift more than 15,000 sub-brokers to the new system under 60 days. This has unnecessarily created panic among the existing intermediaries as the FMC order has called for stiff eligibility requirements in terms of infrastructure, documentation etc."
Apart from conducting an inspection of the branches where the terminals of the authorised persons are located and records of operations carried by them, exchanges have to maintain a database covering details about the PAN number of the entity, details of the member with whom the entity is registered, locations of the branch assigned to the entity, etc.
Commenting on the FMC order, the MCX official stated that it is an exact replica of the Securities and Exchange Board of India (SEBI) circular on capital markets issued in November last year and that the issue is only of nomenclature. "This FMC circular is a complete replica of the SEBI circular on capital markets, which called for discontinuing the sub-broker system last year. Essentially, there is no difference between a sub-broker and an 'authorised person'. The deliberations have been going on for more than 6 months. We had notified FMC that it is only a matter of a change in nomenclature. So why not have the same requirement for sub-brokers, instead of banning them?" he said.
Several commodity brokers agree with this point of view, saying that it is just a difference in nomenclature and nothing more. Most of the national brokers have a practice of issuing contract notes to the client themselves. "It will impact only those brokers who are issuing contract notes to their clients through their sub-brokers. FMC had to intervene probably because of the practice of some local brokers," said an official from a leading brokerage house.
While MCX describes its market intermediaries under the 'sub-broker' nomenclature, other commodity exchanges use different connotations. NCDEX uses the 'authorised person' nomenclature while some of the others describe the same as 'franchisees'. It is all the more exasperating for the MCX as it already does not allow its sub-brokers to issue contract notes to clients, as required of 'authorised persons' under the new FMC guidelines.
FMC has introduced these guidelines to ensure transparency and efficiency in the commodities derivatives trade. The FMC circular stated, "In order to streamline the regulation of intermediaries in the commodity futures market, commodity derivatives exchanges are directed to discontinue forthwith the system of sub-brokers. The members of national commodity exchanges will be allowed to provide access to their clients only through authorised persons."
Earlier, the members of exchanges appointed sub-brokers. Under the new system, authorised persons will be appointed only with the permission of the exchange. Among other guidelines, the order states that the authorised person shall receive his remuneration from the member only and can't charge the clients for his services. This will probably reduce the incentive for the authorised person to have more clients under his belt.
There is a subtle change in the way mutual funds are being sold
Public sector banks are attracting more investor money into equity funds through their large network of branches, post the ban on entry load. Though private banks still lead in total market share, they are falling behind their public sector counterparts.
According to a Boston Consulting Group (BCG) & Computer Age Management Services (CAMS) study, public sector banks contributed 2% of the total equity fund inflows between January-July 2009. This jumped to 5% in the first quarter of 2010.
On the other hand, gross equity inflows from private banks have remained stagnant at 29% in August-December 2009 and January-March 2010 after having declined from 31% in the January-July 2009 period. The largest share of inflows in the first quarter of this fiscal was still from private banks (29%), followed by large Independent Financial Analysts (IFAs) at 19%, national distributors (11%), distributors with online presence (11%), direct channels (10%), regional distributors (10%) and public sector banks (5%). Medium-sized IFAs and small IFAs contributed 5% and 1% of the equity inflows, respectively.
Public sector banks started selling mutual funds only recently. Many private and foreign banks were already selling mutual funds through their branch networks and relationship managers.
"Distributors are not aggressively promoting mutual fund products. Agents of national distributors have not been incentivised properly. There has been some awareness among investors investing online. State Bank of India (SBI) is aggressively selling mutual funds," said RL Narayanan, vice president - equity & institutional sales, Bonanza Portfolio Ltd.
SBI, India's largest public sector bank, has trained 18,000 employees to pass a mandatory Association of Mutual Funds in India (AMFI) exam, making it one of the largest distributors of mutual funds.
Asset management companies (AMC) which sold funds directly through their offices or from their online channels have seen a marginal increase from 9% in August-December 2009 to 10% in January-March 2010.
Large IFAs - who have AUM (assets under management) exceeding Rs1 crore - pulled in 16% of equity fund investments between January-July 2009 which rose to 19% in August-December 2009. Their pie has remained intact in the first quarter of 2010 at 19%. There are around 1,00,000 IFAs registered with AMFI.
Equity inflows from national distributors have shrunk to 11% in January-March 2010 from 12% between August-December 2009 after market regulator Securities and Exchange Board of India (SEBI) abolished entry loads in August 2009. National and regional distributors have their own sales force, offices and online channels; independent IFAs lack these resources.
The first quarter of 2010 saw the launch of equity funds like Axis Equity Fund, Bharti AXA Focussed Infrastructure Fund, Fidelity India Value Fund and Sundaram BNP Paribas Select Thematic Funds - PSU Opportunities. There were 307 equity schemes in the first quarter of 2010 with AUM of Rs19,063 crore. Equity funds witnessed an inflow of Rs478 crore in the first quarter of this fiscal.