William Gamble
The China real-estate bubble

The probability of a real-estate meltdown fuelled by toxic assets does not exist in China. The real problem lies in the absurdities prevalent in the Chinese financial system, which are bound to slow down growth

It finally has happened. A high-level Chinese academic has admitted that there is a problem with the real-estate market. Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank's monetary policy committee was quoted by the Financial Times as saying, "The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis." Well, it's a start.

 But recognition of the problem does not mean a solution. It also brings with it a whole set of assumptions about the future that are simply not true.
In the US, the UK and even presently in the eurozone these crises have specific causes and run a predictable course. A financial panic starts because too much money was loaned carelessly during an expansion. When the cycle turns, what looked like a safe credit risk turns into a toxic asset. As fear spreads through the markets, all lending stops because of asymmetry of information. No one knows who is overextended or who made the bad investments. In the simplest terms you start with a solvency problem which eventually is exacerbated by a liquidity problem.
If you look at the Chinese real-estate market using these criteria, there does not seem to be anything to worry about. It is true that prices have risen dramatically.

Depending on whose numbers you believe, real estate in 70 Chinese cities has risen between 12.8% to 18% over the past year and 95% in Beijing. To buy an apartment in Beijing would cost the average wage earner 17 years' income.
To pay for these skyrocketing prices the amount of mortgages as a percentage of GDP has exploded from an average of 10% from 2005 to 2008 to 16%, while the amounts have tripled from 500 billion yuan to 1.75 trillion yuan. But is this a problem?
Economists argue that it isn't. Most mortgages are for only 50% of the value of the property. So prices would have to plummet by 50% before the property is 'underwater'. Besides, mortgage loans make up only 23% of bank loans. What worries Professor Li is not a financial issue, but social stability. "When prices go up, many people, especially young people, become very anxious," he said. "It is a social problem." This perspective gives a hint that things in China may be different.

The toxic assets are not in residential mortgages. The toxic assets are from local governments through the 8,000 or so local investment companies, now banned.

According to Victor Shih, a professor at Northwestern University, these debts could be as large as 11 trillion yuan, or about $1.6 trillion. S&P, the people who messed up on the US toxic assets, feel that the problem is manageable and that the bad debts will stay below 10%. But does that include the bad debts left over from the last recession? Or the bad debts we don't even know about?

Solvency is a legal term. It depends on how you count a debt. If a State-owned bank doesn't think that its loan to a local government or a State-owned company is a bad loan, then it isn't. Who is going to say something else? If the local government isn't insolvent then neither is the bank. Solvency problem solved.

The same is true of the liquidity problem. It isn't a problem in China because the government can simply order the banks it owns to lend to each other. Last year the Chinese government solved its liquidity problem by telling the banks to lend $1.4 trillion and they did so.So the probability of a real-estate toxic asset-fuelled meltdown does not exist. Does that mean that there isn't a problem? No, because there is. A big problem. The Chinese financial system has failed in its principal economic task. As an intermediary designed to channel assets to the most efficient enterprises, it is a major flop. Not collecting a dud loan means that the money for that loan has been wasted. Evidence of the waste exists throughout China in empty buildings and unrented apartments.

But if there is not going to be a meltdown, what consequences will follow? Simple, slower growth. The burden of this absurd system will be borne by depositors and consumers. By keeping borrowing rates low, deposit rates low and increasing the spread, you can in effect transfer wealth from households to banks, businesses and government, which is exactly what happened before and what will happen again.

Of course, shifting the cost to consumers means that domestic consumption remains low and requires the present imbalance in the Chinese economy to continue, which of course will exacerbate the international trade imbalances and slow growth. So Professor Li is right to worry, but until he worries about the right thing the problems will not go away.

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


Fevicol: Stuck with a bad idea

The new ad is hackneyed and no longer captures the imagination

So, Fevicol is back. A relatively small brand, but one that is best known for its shining, award-winning creative work. Actually, Pidilite Industries (makers of Fevicol) is a dream account for any ad agency. They give their ad agency (Ogilvy & Mather) creative directors total freedom. Not something you can say for 99% of Indian clients. No wonder Piyush Pandey will never let go of the client…. he's gleefully stuck to them with Fevicol!
This time the brand is back with an extension called 'Fevicol Marine', with a promise that the bond doesn't break even under water. The TV commercial is a hark back to its age-old 'tug-of-war' ad for the mother brand. Except that this time, the action has shifted to the backwaters of Kerala. So it's once again 'Dum lagake, zor lagake, haishaaaaaa!'. The occasion is the State's famous snake boat race. Two snake boats are tied to an ancient chair that's placed under water.

 With each boat and its crew pulling from the opposite directions. Egged on by an excitable chap, who I assume must be the brand manager of Fevicol. The idea quite obviously is to demonstrate that the kursi bonded by Fevicol Marine will stay in one piece in these testing conditions.
So no bets for guessing the boatmen lose this competition. Cool. Once again Fevicol does what it does best: make a wild claim using wild exaggeration as the creative route. Don't know how much of it helps in the market place, but award juries are stuck with Fevicol.
My own take: Very disappointing ad. It's an ordinary ad, not even a patch on Fevicol's own sensational past body of work. An obvious idea for a marine adhesive: go under water. And the snake boat trick has been so done to death in Indian commercials, it no longer captures the imagination. In fact, it's totally hackneyed. Some would argue that product performance is nicely demonstrated, so then why crib? Yes, that's true. And for any other brand one wouldn't have dissed this creative. But not for Fevicol. You don't come up with such banal work for any ad agency's dream brand. It's unforgivable, it's criminal.
Methinks creative 'god' and O&M honcho Shri Piyush Pandey is on his annual leave, and is holidaying in some exotic location faraway (no, not the Kerala backwaters!). And so he didn't get a chance to whet this dull storyboard. Come back soon, Sirji! Else your own bond with Pidilite might just come undone. Haishaaaaa!


Fast-moving consumer companies are fast-moving stocks in bourses too

Long considered as ‘defensive’ stocks meant to be held only as a cushion during a market collapse, FMCG companies are charting phenomenal growth and their stocks prices are keeping pace

It is common perception that stocks of fast moving consumer goods (FMCG) companies are defensive stocks. They often take a backseat to the more fancied and hyped growth stocks like software, automobiles or media. It is believed that these stocks should only be considered as a defence mechanism during bear phases. When the broader market is down, these stocks hold their ground reasonably well, offering stability to the portfolio while other stocks take a beating.
Well, the 'stability' logic still holds water. FMCG products, by their very nature, are essential for the daily requirements of all households-be it detergents, soaps, toothpaste etc. Demand for such bare essentials remains steady even during economic downturns. That is why these companies witness steady growth even when other industries are reeling from the consequences of a slowdown.

But, for years now, the performance of FMCG stocks has been far from defensive. It is time that FMCG stocks are stripped off this oft-repeated and generalised 'defensive' tag. Like their products, the stocks are fast-moving as well. Many of the stocks have surged to new all-time highs, outperforming the broader market indices handsomely.

Companies like ITC, Dabur, Godrej Consumer Products, Nestle and GSK Healthcare have performed quite well over the past five years. As a result, their stock prices have also exhibited phenomenal growth. In 2003, ITC was Rs40.

 Currently it is trading at Rs291. In 2006, GSPL was trading at Rs27 and now finds itself at Rs99. Similarly, Dabur and Nestle were trading at Rs12 and Rs500 in 2003-they are now trading at Rs192 and Rs2,811 respectively. GSK Healthcare, which is now trading at Rs1,655, was trading at Rs201 in 2003.

In the last quarter of the previous financial year the results have been especially great. While the Sensex has fallen by 2% between 4 January 2010 and 4 June 2010, the FMCG index has risen by a healthy 10%. Other sectoral indices like auto, banking and software have only risen by 6%, 7% and 2% respectively during this period. The future looks as bright. A KR Choksey report on the FMCG sector states, "We expect FMCG companies to continue their growth story with improvement in the overall economic scenario and consumer spending.

With a likely normal monsoon as is expected by most experts, which would help cool off inflation, it will result in improvement in margins for all companies. Also, normal monsoons would increase the disposable income for rural consumers, giving them scope for more spending on consumer goods."

An Anand Rathi research report confirms, "With falling food inflation and a normal monsoon expected, we expect consumer companies to maintain the revenue growth tempo. However, we anticipate mounting competition to crop pricing power. With the fall in price of crude and lower raw material prices, margins would hold steady." According to KR Choksey, companies with a more diversified portfolio-both product-wise & geography-wise-would benefit more. This would include Nestle, GCPL, Tata Tea and Colgate.

Here is a brief look at the recent performance of some of the top FMCG companies. ITC reported a strong net profit growth of 27% y-o-y on the back of strong revenue growth in cigarettes, agri-business and FMCG businesses.

Revenues surged 30% while EBITDA increased by 25% y-o-y. The stock has reflected the strong growth momentum, surging 15% since its January opening.

Godrej Consumer Products Limited's (GCPL) revenues soared 48% on the back of robust growth in both domestic and international operations. Net profit jumped a phenomenal 55% while EBITDA also surged 52% y-o-y. GCPL's share price has also taken off, rising by 15% since January 2010.

Dabur is not far behind the growth curve either. Dabur's acquisition of Fem Care and strong volume growth boosted its top-line, which witnessed a 17% rise in the financial year 2009-10. Its EBITDA also expanded by 28% due to lower input costs. Dabur's stock has seen a 20% jump since January.

GSK Healthcare has also reported good numbers for the previous financial year. Strong volume growth in biscuits and nutrition supplements and improved realisations boosted its top-line by 20% while net profit rose by 15% y-o-y. Its stock price has surged 26% since January.




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