The bear in the China shop - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The bear in the China shop A  A  A

25 JANUARY 2014

It is not only a bull in a china shop that can be destructive. As far as stockmarkets go, a bear can be even more so. China Credit Trust had floated a high yield, high risk, trust, raising $ 500 m. to high net worth individuals. The money was lent to a coal mining company, which, thanks to excessive pollution, is faring badly, and unable to meet its obligations. The amount at risk is a small part of the total shadow banking industry, which is $ 1.2 trillion and is a key to funding of infrastructure projects and for property developers.

The Government has three options to handle the likely default, due end Jan 2014. It can allow the default, which would spread investor panic in the shadow banking industry, crucial for its economic growth. Or it can make the Trust company, and the distributor (ICBC, in this case, the world's largest bank by assets) responsible. Or it can bail out the borrowers, which creates a moral hazard.

The Shanxi provincial Government is rushing to provide $ 500 m. to prevent a default and a panic.

This is in sharp contrast with how the Indian Government is handling the NSEL scam. In selling the trust, neither the Trust nor the distributor, ICBC, had defrauded investors. In NSEL, the whole scam is an outright fraud. In the China trust, the investors were high net worth individuals. In NSEL there are 13,000 investors, most of them small investors. The Indian Government has been complicit in the fraud and yet has taken no action to compel the scamsters to disgorge their ill gotten money. It seems that there could be vested interest involved because nothing else can explain the Government's inaction. The UPA will pay the price for favouring its vested interest and ignoring the plight of defrauded investors.

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Individual investors, feeling unprotected, turn to other assets. Gold prices have risen on expectations that the Indian Government would ease import restrictions they imposed on gold, in a bid to curb the CAD (current account deficit). On paper the gold imports have fallen, and CAD has improved considerably. But off paper, gold smuggling has increased, from neighbouring countries, including Pakistan. Once such channels are established, they can be used to smuggle other things, including weapons and terrorists. Dealing with that is a bigger problem than dealing with a worsening CAD.

The better way is to try and bring down import of crude oil, by, for example, imposing fuel efficiency norms for cars and trucks. The US introduced CAFE (Corporate Average Fuel Efficiency) norms in 1975 and regularly tightened them. But our Road Minister, Oscar Fernandis, says that the 'time is not ripe' for fuel efficiency norms. If, 39 years after the US, a rich country, introduced them, India, a poor one, finds the time to be unripe, I wonder what circumstances would compel India to consider them? An Oscar for anyone who can answer!

Nor do we truly encourage innovation. A California startup, Siluria, believes it can produce gasoline at half the price, if produced from natural gas. India has just doubled the price of natural gas. India is to auction offshore oil and gas blocks shortly. Although the doubled price makes it more attractive to bidders, the fact that the bidders need to obtain multiple clearances, and not a single window one, is a deterrent.

Thus the statement of Commerce & Industries minister, Anand Sharma, that India's manufacturing sector would create 100 m. jobs and raise share of manufacturing from 16 to 25% of GDP, evokes a good deal of scepticism. Is the Government welcoming of manufacturing? Does it have policies that encourage its growth? The largest foreign direct investment proposal from POSCO, has taken over a decade to obtain clearances, and is still uncertain. The Land Acquisition bill is another problem, not as much for the higher prices the company would have to pay, but for the uncertainty and delay (until 70% of the land owners accept, and the social impact studies are completed) the enactment poses.

The UPA hasn't thought enough about where future jobs will come from. It is doubtful whether the manufacturing sector can provide them in sufficient numbers, because we do not have appropriate policies to encourage it.

The UPA is now, for political considerations, seeking to introduce job reservations in the private sector something which would destroy meritocracy.

Agriculture is being increasingly mechanised, so will not be able to support more people; on the contrary it would shrink. UK inventors, for example, have developed a machine, Robocorp, that can pull out weeds.

One needs to only look at middle America, the Appalachia region, to see the sad impact on societies, when jobs vanish. People use food coupons to buy cases of soda, selling them immediately at half price, to pay for their needs.

Economic growth requires energy to fuel it. In its quest for more energy, the developed world is pushing nuclear energy as a safe, albeit expensive, alternative, that does not generate greenhouse gases. It is far from safe, as the continuing crisis in Fukushima show. One hopes that the Prime Minister reads this article by Junichi Sato, the head of Greenpeace, Japan and who, rightly, says that no amount of planning can forecast nuclear disasters. The cost to societies is unacceptable. He suggests that enough penalties be imposed on suppliers. But the nuclear industry, a powerful one, does not want stiff penalties to be imposed on suppliers. India should then unequivocally not opt for the nuclear option. MMS, who considers the nuclear deal to be his signal achievement, would be unable to act firmly. He takes an ostrich like attitude towards the fact that TEPCO has admitted that Unit 3 may be melting down.

Last week the BSE-Sensex, which was rising till the last date, dropped 240 points on Friday, and ended the week at 21,133, up 69 points. The NSE-Nifty ended the week up 5 points, at 6,266.

The fall on the last day was due mainly to two concerns. First, about the possibility of a default by the Chinese trust, end Jan, and the ripple effect it could have on the shadow banking sector, and hence, on China's GDP growth. Second, about the fall in emerging market currencies, in anticipation of which global investors are selling their stocks.

The RBI has also shown its inclination to make inflation targeting as a priority, which means it is loath to lower interest rates. General elections are also expected to be announced shortly. Though opinion polls indicate that the NDA would be able to head a coalition Government, the announcement will create uncertainty, something global investors dislike.

So, for Indian investors the advice would be to beware the bear in the China shop.

Query for readers: Do you think Indian economy is robust enough to with stand default by the China Credit trust? Do share your views in the Equitymaster Club.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "The bear in the China shop"
Feb 3, 2014
One of the main reason for India not growing in the Industrial sector is the absolute lack of power supply . Among the options , nuclear power is the answer to India's power needs with a booming population and huge demand in manufacturing and related industries .
The argument above is like one should travel by Air , as the chance of the plane crashing are there . In India we just find reasons for not doing the right things on some pretext or the other .One need's to consider the productivity loss due to absence of power and the hardship that a common man has to go thru in the absence of regular power supply .Without a robust manufacturing industry just forget about providing employment to the ever growing population .
Darius Bilimoria
Jan 26, 2014
Some keys words are inadvertently omitted in Para 2, which does not give out the second option.
Thank you for the otherwise informative article.
Purnima L. Toolsidass
Jan 26, 2014
The point about employment is very relevent. Job reservations is a futile program if there is a paucity of jobs. What the Government and NGOs - and also innovative enterpreneurs need to focus upon is vocational training for every kind of service provider groups to have trained and dependable personnll to meet the enormous needs of the middle income group in urban areas. This will provide jobs as well as facilities that people will be happy to pay for. Like 
sudhir apte
Jan 25, 2014
Your complaint about NSEL scam has started sounding like a broken record. If you have suffered a personal loss let it come out as a disclosure. Unfortunately your genuine grievance is falling on deaf ears. I think you will be doing a great public service if you go for PIL on this issue Like (1)
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