»Straight from the hip by Jawahir Mulraj

Coming soon - a bear in a China shop!
19 NOVEMBER 2011

Everyone knows the damage a bull in a china shop can do, it is proverbially famous. But a bear in a china shop would be infinitely more destructive especially if it is, as likely, in China's real estate market. As per an article in www.seekingalpha.com there are 64 million vacant apartments in the country! China has been building homes and commercial office space at a frenetic pace, both to keep its economic growth at the very impressive level it has been as well as to provide jobs to its teeming millions.

Not only are 64 million apartments vacant in ghost towns, but so is commercial real estate, with, as the above article says, the largest shopping mall in the world, in China, lying 98% vacant! The funding for this has come from Chinese banks and rating agency Fitch reckons that banks could take a hit of some $ 2.7 trillion if house prices collapse which is 40% of GDP. Estimates of real estate price collapse range from 20 to 50%.

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The Chinese Government is caught in an obvious dilemma. It is trying to prevent a collapse by making it tougher to borrow for new construction. On the other hand, with 64 million apartments lying vacant (because they are unaffordable) prices need to correct to realistic levels. Obviously many developers and a few banks would then go under when house prices collapse, but that would also dent China's, and the world's growth.

Developers have been using copper as collateral for loans, so, alongwith a housing price collapse would come a drop in commodity prices of copper, cement, steel etc. Given its own pressing needs, it is tough to see how China could use its reserves to bail out Europe.

This would come on top of other troubles. Italy's 10 year bond yields are hovering at the 7% level, considered to be a tipping point for a move towards a bail out. Spain and Portugal are close behind. The latest worry is France! Shares of French bans tumbled last week.

India could have taken advantage of the global turmoil if only we had sensible politicians who followed sensible policies. At the WEF India, held in Mumbai, the normally publicly reticent Mukesh Ambani asked the Government to speed up its decision making. So did ICICI's Chanda Kochhar, Bharti's Sunil Mittal and others. The politicians defend their lethargy by pointing out to the need for accommodating the diversity of needs of India and of social inclusion in economic growth. Forgetting that for inclusion in growth there must be growth.

The Finance Minister has scaled down GDP growth forecast to under 7.7% this year. This can be expected to fall below 7% next year, thanks to the fact that there has been no capital investment made (because of high interest rates and because of policy paralysis) that would help increase production next year. In short, just at the time when global conditions made India a good story by comparision and would have helped attract foreign investment, both direct and indirect, our political leaders have made a mess of things, squabbling like anorexic cats in a barn!

Look at examples of policy befuddlement. In the telecom sector, the Department of Telecom has now asked telecom companies to scrap agreements between themselves which would allow the use of 3G services in the others' network. This policy is so bereft of thought that a mentally challenged blonde with Alzhiemer's could have come up with a better suggestion! It only deprives consumers, whose interests the telecom regulator TRAI is supposed to look after, without even an iota of benefit to anyone.

Even as speeds of telecommunication improve, the speed of the judicial system remains abysmally slow. It has taken 13 years to convict former telecom minister Sukh Ram, now 84 years old, of taking a bribe of Rs 3 lacs! Imagine how long it would take to convict persons accused of a Rs 1.76 lac crores in the 2G scam, if it is in the same arithmetical ratio!

Even this figure of Rs 1.76 lac crores is hugely in doubt. The Comptroller & Auditor General (CAG) sticks to it, but the original inspector of the 2G scam says it is below Rs 3000 crores. There's many a slip between the cup and the lip. The difference is so wide that it makes a mockery of the scandal. As these columns have mentioned, the true scandal seems to be not in the amount of loss to the exchequer (current telecom minister Kapil Sibal says there was none) but in the out-of-turn allotment of spectrum to a few well connected telecom companies.

Spectrum was, quite rightly, priced at an affordable cost in order to encourage the spread of mobile telephony. The flaw was that telecom policy did not think of ways to ensure that the allottees of spectrum at the low rates used it to set up networks and not to quickly sell either the spectrum or the company (or part thereof) as has happened.

The framers of policy also need to be asked why there was no application of mind to ensure this. It, too, has been written about, including by this columnist.

Even as simple a thing as preventing the harmful effect of radiation by telecom towers is only now being made into policy by the prescribing of limits. All it really needed was to study the laws, and experience, of other countries and select the good bits of their telecom policies.

Our policies, however, are less made with a lot of thought and keeping national interest in mind, than as knee jerk reactions. It is only after Kingfisher Airlines ran into deep financial problems (which also affected public sector banks) that the Government quickly allowed foreign direct investment, upto a limit, into the civil aviation sector. Why wait for a crisis?

As Naresh Goyal points out, the crisis happened because Air India entered into a price war, forcing competitors to match low fares. Now Air India seems to have a deep reservoir of funds; every few months the owner pumps in dollops of equity capital. The owner happens to be the Government of India but sadly, the funds happen to be taxpayer money. In other words the tax payer, which, because of indirect taxes includes the entire population of India, helps subsidise air travellers. Welcome to India!

In the wake of global problems which do not abate but are getting worse, the stock market slid all of last week with the BSE-Sensex ending at 16371 (down 821 over the week) and the NSE-Nifty ending at 4905 (down 263).

What next?

The sensex will test the 15,700 support level. If it holds, we would see a rally. If it cracks, then there is a big fall ahead. This could happen if the bear enters the China shop. So investors ought to pray for a bull in a china shop!

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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