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Asia devoid of bubbles?

Oct 7, 2009

The last time we heard China's banking regulator, he was very sanguine about the 'moderate' pace at which the economy's bank credit is growing. Moderation in the Chinese language seems to mean growth rate in excess of 30% YoY when some of the largest banks globally are not growing loan books beyond 10% to 15%. The Chinese seem to have now taught their language very well to the IMF as well. What else can we infer from the statement of IMF Asia Pacific chief - "No significant asset bubble risks in Asia"? This statement comes at a time when China's US$ 585 bn stimulus is pump priming not just its own but also the US economy. China's investment in infrastructure projects soared 102% YoY in 1QFY10 (as per the National Bureau of Statistics) thus stimulating demand for metals and equipments. The excessive capacity building investment is creating bubbles not just in commodities but also in the financial markets. Nevertheless, the IMF does not see anything unusual here.

"You scratch my back and I'll scratch yours". That seems to be the relationship between China and the IMF. While its currency regulation is the Achilles' heel for China, the IMF seems to be willing to turn a blind eye to the same. Don't worry! There are no free lunches here. When IMF toughened its exchange-rate monitoring rules in 2007, China feared that was a ploy by the US to enlist the organization's support in the US campaign for a stronger Yuan. Hence, China blocked IMF's annual assessment of its economy until the fund reversed the rule this year. In recent months, China and IMF have gone a long way to mending their relationship with the dragon country agreeing to buy up to US$ 50 bn in IMF bonds. IMF will use the funds raised to support economies hit by the financial crisis. While this give- and-take relationship serves well to align the economic interests of the IMF and China, it could turn out to be catastrophic for not just Asian but global financial markets.

Disinvestment capers
After NHPC and Oil India, it could well be the turn of NMDC this year to fill in funds in the empty government coffers that are battling with huge deficit numbers. While the government authorities are leaving no stone unturned to underscore their 'austerity' drive, the disinvestment department seems to doing its bit too. As per a leading business daily, government officials have confirmed sale of at least an 8.3% stake in state-run miner NMDC by the end of FY10, which could fetch the government about Rs 100 bn (US$ 2.1 bn).

The federal government's annual Economic Survey - released in February - had set a target of 250 billion rupees a year from stake sales in state-run companies. But, the government has managed to net only 42.21 billion rupees through share sales in two companies - NHPC and Oil India. The government needs cash to bridge a budget deficit that is estimated to swell to a record 6.8% of gross domestic product this year after it cut taxes and increased spending to boost economic growth.

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