This crash will be worse than the European crisis...

Dec 6, 2011

In this issue:
» The reason why RBI didn't intervene to curb the fall in rupee...
» 15 Eurozone countries face risk of downgrade
» Will the US slide into depression by 2013?
» Does this mean an impending bear market in commodities?
» ...and more!
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The global economy is gripped by a myriad of crises; each crisis competing with the rest in a race of wealth destruction. While the US and the Eurozone have hogged the limelight for all the economic and financial mess their policymakers have created, a giant oriental economy is gearing to shadow the Western economies on this front.Yes, we are talking about none other than China. After 30 years of defying economic gravity, the dragon economy is showing signals of a probable hard landing. In a recent 5-Minute Wrapup, we had mentioned that aneconomic crash in China could send the commodities market tumbling.

But let's ponder some more about why the economic turmoil in China could be extremely disastrous for the global economy. For one, there is still not much consensus about how things are panning out in China. There are the optimists who believe that things are fine in the Asian giant. There are hopes bound on China to bail out the developed world.

Then there are people on the other end of the pole. Take for instance, economic commentator and business professor 'Larry' Lang Xianping who has often exposed the problems of the Chinese economy and even been proved right. He makes some very distressing claims. We'll mention some of them for you to consider: a) Unlike the official numbers that claim the Chinese economy to be growing at a brisk pace of 9.1%, the economy is actually is in recession, declining by about 10%; b) Again contrary to the official government figures which claim inflation to be at 6.2%, real inflation is nearly 16%; c) At US$ 5.7 trillion, China's debt burden is higher than its GDP (Gross Domestic Product).

If Mr Lang's claims are anywhere close to reality, the world has a big reason to worry. Whenever the crisis strikes, it will wrought havoc in the financial and commodity markets. India, too, will certainly not be unhurt in the short term.

Did we just say the world has a big reason to worry? Yes, but leave that job to economists, central bankers, policy makers etc. If you fret now, you will miss the big picture. To give you a hint, China's problems could mean opportunities for India. If you are a serious long term investor, there couldn't be a more exciting time.

Could an economic crash in China bring up opportunities for India? Share your comments with us or post your views on our Facebook page. / Google+ page.

 Chart of the day
In recent times, the massive decline in the rupee has emerged as a new concern for the Indian economy. In the second quarter of 2011-12, many companies witnessed significant forex losses. Many complained that the Reserve Bank of India (RBI) took no measures to curb the steep fall in the currency. Today's chart of the day provides an explanation for that. As you can see, short term forex debt falling due in less than one year has been continuously on the rise, from 38.7% of forex reserves as on 31st March, 2010 to 43.5% as on 30th June, 2011. Though our forex reserves seem sizeable at US$ 308.6 bn as on 18th November, 2011, you must not forget that these reserves are not a result of current account surpluses. Not surprisingly, the RBI has remained a mute witness to the rupee fall.

Data source: The Mint

Rating agencies have for a while been downgrading economies in the Eurozone that have shown signs of an impending debt crisis. However, funds that are expected to salvage the financial stability of the economies and the euro currency are also getting affected by the ratings. While this will not solve the debt problem, it will certainly ensure that bailouts do not occur at the cost of taxpayers in healthier economies. All 17 eurozone states contribute to the European Financial Stability Facility's (EFSF) US$ 590 bn war chest. But the fund's AAA rating is highly dependent upon the ratings of France and Germany. Thus a rating downgrade will mean that Europe's rescue plans could get jeopardised as the attractiveness of EFSF bonds as an investment will dwindle. While we do see the ratings to be a dampener in the Eurozone's rescue plan, the faster the policymakers realise the importance of punishing the guilty, the better will it be for the global economy.

For most experts, the big question that needs answering is whether the US economy at the edge of a cliff or not? But not for a certain Jim Rogers. The maverick investor seems to have already made up his mind. For him, the question is not a matter of if but when? In other words, the US will indeed go through a bad recession or even depression and that could happen as early as 2013. "In America we have had recessions every four to six years since the beginning of the Republic. So by 2012 or 2013, we're going to have another one, and it's going to be much, much worse", the bow tied Indiana Jones of finance is believed to have said. As per him, when an economy hits a rough patch, the right thing to do is to allow the slowdown to run its course. But the US chose to look the other way. It poured trillions of dollars hoping that bankruptcies and defaults will not take place and the US economy will regain its lost vitality. But that was not to be. All that the measure ended up doing was shifting the debt from private to the public sector and bloating it up even more. Thus, we won't be surprised if Rogers proves to be right on the ball on this one.

If you look at the journey of most successful nations, you will find a distinctly similar pattern. Almost without exception, each of them went from being an agrarian economy to an industrial economy and finally settling down to having a predominantly service sector orientation. However, India appeared to be cast in a different mould. It bypassed the manufacturing led growth and currently has the services sector as its biggest source of GDP.

But this may not be in India's long term interest. If the economy has to grow robustly and create employment opportunities, the industrial machinery will have to become a well-oiled one. And for this to happen, just pumping in money into factories and building huge plants may not suffice. Quality improvement and innovation will have to be given just as much consideration. Thus, while government policies like the National Manufacturing Policy that was passed by the cabinet recently may indeed be of great help, Indian manufacturing companies would do themselves a world of good if they also looked inwards and started taking steps to improve the long term sustainability of their own businesses. This would also help strengthen the Indian manufacturing sector in the process.

Layoffs and downsizing are two words that have become synonymous with the global crisis. Companies that are facing troubled times have been cutting down their workforce with the hope that this may help in containing costs. Obviously when a big company announces such measures it is assumed that the problem may be more specific to the entire sector. Such may be the case for the commodity sector. That is if the current news from the global commodity trading giant, Cargill, is to be relied upon. Cargill has announced that it plans to trim its workforce by 2,000 employees due to the subdued outlook for the commodity sector. The sector had witnessed increased investor interest particularly after the QE (quantitative easing) programs of the US opened a dam of cheap money. Most of this found its way into the commodity markets leading to a sharp upsurge in the prices of the same. But the good times seem to be coming to an end forcing Cargill to adopt extreme measures to bring down their costs. However their listed peers have not painted a similar bleak picture. Therefore, it remains to be seen whether the problem is specific to the company or would it spread to the entire sector. If the latter is true, then the commodities maybe the next one headed for a bearish trend.

The Indian stock markets were closed today on account of Moharum. All other Asian markets ended the day in the red with stock markets in Taiwan (down 2%), Japan (down 1.4%) and Hong Kong (down 1.4%) leading the losers.

 Today's Investing Mantra
"Every business is manmade. It is a result of individuals. It reflects the personalities and the business philosophy of the founders and those who have directed its affairs throughout its existence. If you want to have an understanding of any business, it is important to know the background of the people who started it and directed its past and the hopes and ambitions of those who are planning its future." - Thomas Rowe Price Jr.

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7 Responses to "This crash will be worse than the European crisis..."


Dec 7, 2011

Hello Sir,
While every other nation facing the curse of economic problem & as we also have enough to cover our part to the show I hope the world is slowly sliding into Bleak dark whole.


Yatin Parikh

Dec 7, 2011

China's doom could well become India's gloom, only if our political parties stop infighting, pause to think hard about the country's future instead of theirs. Instead of serious political reforms to move ahead, our politicains are hard pressed to stop them and keep us a backward nation.
We need Narayan Murthy and Ratan Tata as President and PM !!
(with the US, EU and China down, India can only go up)



Dec 7, 2011

If economies crash in China will it really bring boon to India? A big question mark. Where are we as regards infrastructure? What about political expediency? Every politician wants to play a safe game of appeasing gang leaders of vote banks. With a huge potential market with not much purchasing power, I wonder things will work out the Indian way since the west is also in doldrums.


sarvotham yerdoor

Dec 6, 2011

I doubt if India would be able to exploit the opportunity when it comes. We have equally incompetent politicians and bureaucracy to ensure that we would also end up in the ditch and put the blame on others for our difficulties.



Dec 6, 2011

China is structurally strong with domestic market, resources to compete, foreign reserves. It can spend it's way out of problems



Dec 6, 2011

please sir u just gone through markefeber inverview in ( is also worried about china.but same there is couterpoint argument by jimroger again markfeber worrisam about china.he said what faber worried about china its not true there is but not all the part of china some part of china.detail inverview in website (


LS Ullal

Dec 6, 2011

Chinese economy might have less steam left to sustain the 10% growth touted so far; yet they are sitting pretty on a large forex reserve of some 3+ trillion dollars to fend off any serious threat to their economy. Compare that with India's forex reserve of 300+ billion dollars (mind you, it is not current account surplus but mainly compose of a major part of 'flight capital' invested in the stock exchanges). So, India's situation is precarious; already we are witnessing the distressed situation rupee is in. With the double whammy of corruption at high places and non governance, we are already experiencing stress on growth and all the figures touted by RBI and Finance Ministry has gone for a toss. Add to that the not so easily budging inflation, the economy indeed is in a sorry state. With our major export markets facing trouble and our import bill ballooning up every month, Indian rupee will face severe stress. The erosion in value terms just cannot easily be filled as the economic activity will not improve in the next two quarters. We may find some opportunities thrown up our way by problems at Chinese economy, yet they will be of miniscule proportion. Unless manufacturing sector contributes healthily, the economy will not rebound to realize a higher level of growth. Unless growth goes up to 7.5 to 8% the social spending cannot be sustained which spells trouble for the ruling UPA government in the near term.

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