One big reason to be bearish on China - The 5 Minute WrapUp by Equitymaster
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One big reason to be bearish on China

Jan 15, 2011

In this issue:
» Another green source of power waiting to be tapped
» Investors exiting emerging markets and flocking to US
» Apex court raps the Government on black money
» India worst performer of the week
» ...and more!!

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00:00
 
China. Clearly, the economic miracle of the past few decades. Every time one has tried to spell doom for the dragon nation, it has emerged stronger than ever. Take the case of the recent global financial crisis. The scale of its destruction was unlike anything that the world had seen in recent times. In fact, it was meant to be the kind of blow that even the dragon nation would find hard to evade. After all, an export driven economy cannot grow at the same pace as before if its biggest customers go down under. However, yet again, China proved all sceptics wrong. It quickly unleashed the mother of all stimuli and ensured that its economic engine kept humming full throttle. Thus, yet another storm had passed. Without causing the slightest of damage to the Chinese economy.

But wait, there seems to be a nice little twist in the tale. Looks like the celebrations were a little premature. Moneynews reports that a huge US$ 1.5 trillion worth of loans, bulk of which was borrowed in the aftermath of the financial crisis, will come up for repayment in 2011. And things are not looking good on this front. As per a Chinese Government official, there are strong chances that nearly one fourth of those loans are not likely to be repaid.

Whichever way you look at it, these are not numbers to be taken lightly. Furthermore, there could well be an element of truth in this story. Logic dictates that an economy cannot turn from being export driven to investment driven in such a short span of time. If too much investment is done, it is quite likely that it has been done without any thought for long term economics. And this is exactly what seems to be happening in China. In order to avoid its economy from going into a free fall from lower exports, it invested left, right and center and now, quite a few of these investments are about to turn sour. Although the Chinese growth story may not completely derail yet, it could well stare at years of sub par growth.

Let us know what you think of the Chinese growth story? You can also comment on our Facebook page.

01:15
 Chart of the day
 
Apart from China, the other 'C' story that has been hogging the limelight is that of crude oil. The commodity has been scaling new highs in recent times and since India being a huge importer of the same, it is certainly hurting India's trade balance. What more, if the trend keeps persisting, it could hurt the India growth story as well. Today's chart of the day tries to explore whether there has been any co- relation between crude prices and India's benchmark stock index, the Sensex over the past decade or so. As the chart suggests, while no definite pattern is emerging, the Sensex has indeed went on to do well in years where crude prices have remained subdued. The one exception could be the year 2008 and that's pretty understandable as except the dollar all other asset classes went downhill here.

Source: US EIA, Trend

01:54
 
A virtually unused power source covering over 70% of our planet. Estimates indicate that around 15% of world energy demands can be met from this source. It can provide India with at least 5% of its annual power demand. And the best part is that it is completely green! Well, we are talking about tidal energy.

India is planning on commissioning a 50 MW (mega watt) tidal power project off the Gujarat coast by 2013. This will be the first such project in Asia. Atlantis Resources, a London based marine energy specialist and Gujarat Power Corp will be the ones working on the deal, at an estimated cost of 7.5 bn. This plant is expected to be scaled up to 250 MW in the future.

Typically a tidal power plant takes 8-12 years after commissioning to break even. But it has significant advantages. Unlike wind power it is highly predictable due to accurate predictions of tidal movements. Also, since sea water is much denser than air, it can provide a lot more energy. India is surrounded on 3 sides by the sea. It has more than 300 days of sunshine and a large installed capacity of wind turbines. It has the right environment for a tidal, solar and wind energy revolution. Investing in more renewable energy projects will be the best way for India to secure its growing energy needs.

02:41
 
The inflationary monster has created a menace for emerging market economies. This has forced their central banks to raise interest rates on several occasions in the last one year. At the other end of the globe, the US Fed has pledged to keep rates near zero for an extended period and also continue stimulus plans. Such moves have dampened the interest of investors in the stocks of emerging economies. Corresponding, a lot of investors are flocking to the US.

Let's try and put this in a proper perspective. Both emerging economies and the US have their own set of illnesses. Emerging markets are ill with rising price pressures, something akin to a fever. The central banks are exercising caution in return by tightening credit. Fair enough remedy for the given illness. And what is the US suffering from? Cancer? Well, you can have your own guess. But one thing is certain. The illness is grave and deadly. And what is the remedy that the US Fed is dosing out? Steroids and painkillers? You don't need to be a doctor to realise that these are not measures to cure such a terminal illness. All they do is give temporary relief. The prospect of eventual turmoil remains quite intact.

In conclusion, we quite agree that emerging markets are expensive at the moment. They will have to forgo higher growth for a while. But we remain positive on the long term prospects. So, though investors could probably make a relatively good buck in the US this year, money will eventually find its way back to good health i.e. emerging markets.

03:34
 
'Black money' is a phrase that every Indian is acquainted with. And the fact that most offenders tend to stash their black money in foreign bank accounts, is another known fact. The government had declared last year that it would take every step to get the huge stash of black money back to the country. In accordance with this, the government went ahead and sought names and details of accounts held in different countries. But now it does not wish to disclose this information. Reason- Only the government knows the reason behind not disclosing it. But the Supreme Court did not find this stance very amusing. It has rapped the government for the delay in giving the information on black money. The Solicitor General has assured the Supreme Court that he would get back with the government's reply on this by next week.

This is just another instance of the government's inefficiency in sorting out the problems. It is quite easy to talk about bringing offenders to justice but it is altogether a different ball game when it comes to enforcing this. We wish the government pulls up its socks and deals with issues on time and in a more efficient manner. Unless it does, India would remain a land of scams where the corrupt go scot free.

04:18
 
As far as global stock markets over the past week are concerned, the week gone by has been a negative one for the Asian markets. Among the Asian countries, only Hong Kong (up 2.5%) closed the week in the green. China, Singapore and Japan closed the week down 1.7%, 0.5% and 0.4% respectively. India, down 4.2%, has been the biggest loser for the second consecutive week. The top gainer of the week was France, up 3%. Germany and UK also ended the week in the green, up 1.8% and 1.3%. This performance came on the back of successful bond auctions held by Italy and Spain last week, as they took the edge off the euro zone's debt tension, even though buyers demanded higher interest rates for both issues. In Americas, Brazil was up 1.3% while US closed the week up 1%.

Source: Yahoo, Kitco, CNN finance

04:53
 Weekend investing mantra
"Investors repeatedly jump ship on a good strategy just because it hasn't worked so well lately, and, almost invariably, abandon it at precisely the wrong time." - David Dreman

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7 Responses to "One big reason to be bearish on China"

Manoj

Jan 2, 2013

India is a disaster of it's own making - a people brought up in slavery for generations simply gave away control to their new home-born 'rulers' and went back to their medieval ways. China, on the other had, is a product of nationalistic pride and ambitions, and social repression.

India is likely become a Haiti or a Nigeria at a massive scale. China is already a world power, whether we like it or not.

Comparisons between the two no longer make sense, as the only things they share are their large populations and presence in Asia. leadership matters!

Like 

captainjohann

Jan 19, 2011

Indians love to hear anything which puts down China. Chinese leadership is patriotic and knowledgeable.See how they used German speed rail technology and updated indigenously.When we have a leadership which doesnot read western magazines, then we have some hope. In meantime China is growing.

Like (2)

Jaya

Jan 17, 2011

The bullish outlook on China is worth betting upon. The Chinese are CLEVER. The pointers to this fact over time ... long term, are many.

Like (2)

Shrinivas

Jan 15, 2011

As they say "If it's too good to be true then may be it's not true". More I hear about China going strength to strength against all odds of financial and social challenges, I am more convinced this is a landmine ready to explode. I am more convinced about this since all the news we get from China is doctored or censored, and we really don't know what's the real truth.

Like (1)

Shrinivas

Jan 15, 2011

As they say "If it's too good to be true then may be it's not true". More I hear about China going strength to strength against all odds of financial and social challenges, I more convinced this is a landmine ready to explode. I am more convinced about this since all the news we get from China is doctored or censored, and we really don't know what's the real truth.

Like (1)

Constance Blackwell

Jan 15, 2011

the China vs India story may make good journalism but it is beside the point, except obviously governance of each country is terrifically different. No I would not invest in real estate in China now, but I am investing in Mongolian natural resources. For India there are many exciting ventures to chose from, my problem with selecting which Indian stock to buy has to do with the research available. The stocks I own that have to do with the China story are either Canadian or English, and can be followed, outside of major international indian stocks, despite the massive number of companies issuing stock - the information about them is sparse - - and I don't like funds. I have made money of course on Infosys.

Like (1)

M.Dinakar Shetty

Jan 15, 2011

China's fall if at all may be for some other unexpected reasons than what you mentioned as for the reason of difficulty in repaying a loan of 1.5 trillion dollars during 2011. They are far more meticulous in their planning for the future than we imagined. 20 years back, subject of anybody's discussion on nation front, used to be of the population problem of China. Today that is a forgotten subject. Even developmental matters are so handled, within next few years, they are going to be number 1. We are yet to know the secret of their success in successfully handling Global recession. Probably, you are forecasting a wild guess of their doom!

Like (1)
  
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