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On This Day - 1 JUNE 2011
This Chinese industry can spell trouble for the global economy!
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The country has now launched a massive drive to keep the boom in the construction industry going and to also address issues of growing income disparities. The Chinese government has ambitious plans to build about 36 m subsidised housing units in the next 5 years. Meaning, people who cannot afford to buy or rent houses in cities will be offered the same at significant discounts.
But why is the world so worried about the Chinese property market? Let us explain a bit and you will agree that it is definitely a matter of concern.
The growth model of Mainland China is heavily dependent on the real estate and housing construction sector. This sector, in turn, is a crucial determinant of commodity demand. If certain estimates are to be believed, the Chinese dragon devours up to 50% of important global commodities and materials like steel, iron ore, coal and cement. For instance, about 40% of China's steel demand comes from direct construction activity. But if you account for property-related and property-dependent steel demand, it would account for more than 65% of China's total steel consumption.
So it's clear how important a player China is in the global commodity and materials market. It is no wonder then that any slowdown in the Chinese property market will have major global repercussions. If you look at the economic data of recent months, it is evident that manufacturing activity has slowed down on the back of monetary tightening. Though it is difficult to predict the fate of the Chinese property market, whenever the tide turns, the tremors will rock the entire globe.
Indeed, it is not just India but several countries in this fastest growing region that are facing the brunt of inflation. One is forced to wonder whether this slowdown is a short term phenomenon or whether we are beginning to witness a more prolonged slump. Other than inflation, oversupply has also been another reason which has led to slowdown in profits of various Asian companies who have responded by cutting back production. To add even further, a meaningful recovery has not really taken place in the developed economies of Europe and the US. Most probably, emerging economies in Asia will be on the back foot until such time that inflation is brought under control. But from a long term perspective, strong demand and immense growth potential should still see these economies outperforming those in the West.
Data source: Central Statistical Organisation
The idea is no doubt a sound one. After all, even SMEs have the right to raise money through IPOs and, hence, get access to long term money for growing their businesses. But we would be making a big mistake if we underestimate the risks involved. It should be noted that chances of an SME business model going awry and failing is much higher than that of a large cap company. Then there is also the issue of sound corporate governance policies, which as we all know is compromised at a higher frequency in SMEs than large companies. There is no doubt that a dedicated platform for SMEs will give investors access to a much larger pool of companies. Their due diligence, however, will also have to go up a great deal. Failing the same, there would be more money to lose than gain we believe.
The current rules on issues like mergers and acquisitions actually deter consolidation instead of supporting it. Additional issues like spectrum charges, spectrum sharing, etc that can actually help in easing the pressure on margins are just not dealt with in the current telecom policy. As a result, most operators have cut back any additional investments into the networks. This, in turn, is hampering network quality and raising questions on future growth. To address all this, the telecom minister has promised that he would deal with all these issues in the new policy which is expected to be in place by September this year. The new telecom policy would resolve the issues in a manner that is both conducive to industry's growth without hampering the interests of the consumers or the government. However, given the government's track record in dealing with such issues, we would keep our hopes restrained.
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