China's great gamble - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

China's great gamble 

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In this issue:
» Citigroup's insatiable need for funds
» Tata Steel beats expectations
» 55 m people pushed below the poverty line
» US economy slides 6.2% in December quarter
» ...and more!

When in trouble, people respond instinctively. Seems like countries do too. Faced with an economic slowdown, China is falling back on its instinct, which is to stimulate economic activity by creating industrial capacity and it has chosen petroleum refining for the purpose. As per the Wall Street Journal, Sinopec and PetroChina will add a refining capacity of more than 2 m barrels per day. China plans to process around 9 m barrels of oil per day in 3 years. These companies are currently strapped for cash but have no option but to comply with their masters' fiat.

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China is clearly gambling. There is an overcapacity situation in the refining industry worldwide. In addition, the demand outlook for petroleum products is weak due to the worldwide economic slowdown. If the economy recovers and demand for oil product shoots up like China expects it to, this move will look farsighted. If it doesn't, it will be left feeding the proverbial white elephant.

India's largest private sector company, Reliance Industries (RIL), is set to get even bigger. The company is set to merge its subsidiary Reliance Petroleum (RPL) with itself to create an organisation with combined sales of around 20% of all BSE-Sensex companies. Both the companies' boards will meet on March 2 to finalise the merger process. The merged entity will be the sixth-biggest private sector refiner in the world with a total capacity of 1.2 m barrels per day.

As reported in The Economic Times, 'the merger will help the combined entity save on income tax and dividend distribution tax. It will also create a much bigger balance sheet, which will help RIL raise money for working capital and for expansion.'

While there's no denying these arguments that RIL will emerge as a colossus after this merger, we are concerned that the increased size of the company will further enhance its standing in decisions regarding India's energy policy, where we have already read much about its malicious international dealings and other misrepresentations. We also raise doubts on the timing of this merger, given that RPL's losses during the current quarter will now be veiled by the consolidation of its financials with RIL.

The Enforcement Directorate (ED) is already probing RPL's dealings in the UN-administered oil-for-food programme that ran from 1995 to 2003. As reported in leading business dailies, the ED has sought approval from the finance ministry to approach authorities in Iraq, Lebanon and Jordan for details on whether RPL paid anything extra to Saddam Hussein's regime to secure oil contracts under this programme.

Global banking behemoth Citigroup, which at one point had been deemed "too big to fail", will be in need of more government funding. Infact, as reported in the New York Times, the US treasury department reached a deal to take a stake of 30% to 40% in the beleaguered bank as part of a third bailout. Further, the current CEO Mr. Vikram Pandit will continue to head the bank despite receiving considerable flak for not being able to turn things around. However, the bank may most likely have to shake up its board so that it has a majority of independent directors. While the increase in stake of the government in Citigroup has raised the specter of nationalization, some comfort can be drawn from the fact that the Fed chief Mr. Ben Bernanke had earlier voiced his aversion towards nationalizing US' big banks. However, given the uncertainty, it remains to be seen how developments on this front pan out. All said and done, as of now, taxpayers who have injected more than US$ 45 bn into the bank, have become Citigroup's single largest shareholder.

Tata Steel pleasantly surprised the street with its consolidated results for the December quarter announced yesterday. Despite the slowdown in the domestic market and recession in most developed parts of the world resulting in a slump in demand for steel and lower realisations, the company managed to grow its topline by 4% YoY during the quarter.

But the lower operating margins during the quarter dented the company's bottomline which witnessed a fall of 44% YoY. But that seemed much better than expected by the majority in the market, as the stock gained almost 6% on the bourses yesterday.

Now this is one development that is likely to give the ruling UPA government sleepless nights especially when general elections are a sniffing distance away. Kolkata based Indian Statistical Institute has just come out with a results of a survey from about 124,000 households across the country. And the results of the survey have punched a big hole in the present government's claim that it has been able to alleviate poverty in the country during its regime. Infact, if the results are to be believed, about a staggering 55 m people have been further pushed below the poverty line. This, at a time when the country recorded its best economic growth ever. A sorry state of affairs indeed as what the country needs is not lopsided economic growth where the rich get richer but a more equitable growth whereby the benefits of higher growth percolate down to the poorest sections of the society.

What is even more disturbing is the fact that the poverty in India is becoming increasingly concentrated. As per a daily, Sunday Pioneer, a stunning 14 out of West Bengal's 18 districts are among the 100 poorest in India and Eastern India as a whole is going deeper and deeper into the quicksand of poverty while the Western regions continue to witness rising aspiration levels.

The writing was clearly on the wall. With firms cutting jobs left right and center and the country's financial institutions far from standing firm on their own feet, it was expected that the US economic growth would continue to go downhill during the fourth quarter of 2008. And now, it has been officially confirmed. The country's commerce department has announced the GDP numbers, stating that the economy slid 6.2%, its worst quarterly showing since 1982. For the full year though, it still managed to pull off a little more than 1% growth, thanks mainly to its good showing during the first half of 2008. However, even this luxury will not be available for 2009, a year, which is widely believed to go down in history as the year of the great recession. The US$ 787 bn stimulus may likely kick in by the second half of 2009 but is unlikely to help avoid the specter of a negative economic growth for the full year 2009. The US economy clearly has no place to hide currently.

Indian indices saw a marginal change during the week. The benchmark index, the BSE-Sensex, rose a modest 0.5%. But that was relatively better off than its neighbour - China saw its benchmark index plunge by 7.9%. Despite the tumultuous times, Japanese markets put on a decent show by rising 2.1% during the week.

Markets in the US and European region were marked by ubiquitous declines. While Germany saw the biggest decline of 4.3%, US's benchmark index fell 4.1%. Markets in France and the UK too saw declines.

Source: Yahoo Finance Source: Yahoo Finance

After the recent buoyancy in prices, gold fell by about 6% during the week. This as the dollar strengthened to the highest level since April 2006 and thus taking away from the attractiveness of gold. Crude oil on the other hand saw a weekly gain of about 11% to finally close at US$ 44.8 per barrel yesterday.

04:55  Weekend investing mantra
"The worse a situation becomes the less it takes to turn it around, the bigger the upside" - George Soros
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