VOL. 05,NO. 13,January 13, 2012 (Poush 29, 2068)]

By By Robert J. Samuelson

Even China? Could the world’s economic juggernaut, having grown an average of 10 percent annually for three decades, face a slowdown or what for China would be a recession? Does it have a real estate “bubble” about to “pop”? What would be the global consequences? Treasury Secretary Timothy Geithner visits China and Japan this week. These questions form a backdrop. With Europe’s slump and America’s sluggish economy, a sizable Chinese slowdown would be bad news.

China inspires ambivalence. Its policies — especially its undervalued exchange rate — are skewed to give it an advantage on world markets. This has cost jobs in the United States, Europe and developing countries. Still, China is now such a powerful economic force that an abrupt slowdown would ripple beyond its borders. Trade would suffer. China’s protectionism might intensify to offset job loss. If surpluses of steel and other commodities were dumped on world markets, prices and production elsewhere would fall.

There are warning signs. Economist Nicholas Lardy of the Peterson Institute cites three. First, Europe’s slump has weakened China’s trade; Europe buys about a fifth of its exports. Second, housing is showing signs of a bubble and is deflating. Finally, China’s government will have a harder time deploying a stimulus than during the 2008-09 financial crisis. Government debt rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP in 2010.

How all this affects China’s growth is controversial. “Most likely, China will have a soft landing,” says Justin Yifu Lin, the World Bank’s chief economist. “Growth goes to 8 percent or 8.5 percent.” That’s down from about 9 percent in 2011. Government debt is still low enough to permit ample stimulus, Lin thinks. Many forecasts agree.

But skepticism is mounting. The Japanese securities firm Nomura sees a one-in-three possibility of a “hard landing” — a drop in growth to 5 percent or less. To Americans, now experiencing annual economic growth around 2 percent, this may seem fabulous. But for China’s modernizing economy and huge labor force, a 5 percent growth rate would raise unemployment and social discontent. The adverse GDP swing would roughly equal the U.S. decline in the 2007-09 recession.

Housing may settle who’s right. China has vastly overinvested in housing, argues Lardy in a new book (“Sustaining China’s Economic Growth After the Global Financial Crisis”). The main reason, he says, is that financial policies prevent savers from realizing adequate returns on their money. The stock market is seen as rigged. Government regulations keep interest rates on bank deposits — the main outlet for savings — low. From 2004 to 2010, they were less than inflation. Frustrated savers invest in housing, where prices are not regulated.

The result seems a classic speculative bubble. People buy because they believe prices will go up; and prices go up because people buy. A 2010 survey found that 18 percent of Beijing households owned two or more properties; another 2010 survey of all cities found that 40 percent of purchases were for investment. Many units, Lardy reports, are vacant because rents in Beijing, Shanghai and other major cities are low.

Unfortunately, booms breed busts. Buyers ultimately recognize that rising prices reflect artificial demand. Purchases slow. Prices fall. New building declines. The process feeds on itself. With modest imbalances, the result is a correction. Otherwise, there’s a crash.

Which does China face? A popped real estate bubble could exert a big drag. Housing construction exceeds 10 percent of GDP. That’s historically high, says Lardy. At a similar stage of economic development, Taiwan’s housing investment was 4.3 percent of GDP. In the recent U.S. real estate boom, housing peaked at 6 percent of GDP. In China, housing stimulates much consumer spending (furniture, appliances) and accounts for 40 percent of steel production, notes Lardy. Land sales are also a big revenue source for local governments. All would suffer from a housing bust.

There are mitigating factors. Outside Beijing and Shanghai, it’s unclear that housing prices are “out of line with household income growth,” says economist Eswar Prasad of Cornell University. Chinese buyers also typically make large cash payments for their properties. Compared to United States, a housing bust is less likely to become a banking crisis as mortgages sour.

Whatever happens, China’s economic model is reaching its limits, as Lardy argues. It has relied on exports, promoted through the controlled exchange rate, and investment, including housing, subsidized by cheap credit. Meanwhile, Chinese savers have been punished by the low returns on deposits. This dampens their incomes and consumption spending. The trouble is that the global slowdown threatens exports and housing’s excesses threaten investment. Unless China can switch to stronger consumption spending, its economy will slow — or it will achieve growth by becoming even more predatory toward other countries.

(The Washington Post)

By Oliver Jones

The Indian economy is not looking good to investors, with two top financial organizations indicating concern on its prospects in 2012.

“Economic prospects [in India] remain grim; expect multiple compression. The Indian economy continues to slow, and the fiscal situation continues to worsen”, notes a January 9 Credit Suisse report.

In the last quarter of 2011, the market had become less concerned about a hard landing in China and more concerned about the prospect of a hard landing in India, Andrew Swan, managing director and head of Asian equities at BlackRock, observed in a recent media briefing.

BlackRock’s Swan notes that China and India account for about two-thirds of industrial production growth in the region and - while equity returns don’t always follow industrial production by country - they do for the region as a whole. Observing that the market was heartened by recent PMI [purchasing manager index] numbers for China and India, “I wouldn’t be surprised to see PMI rollover again”, he adds.

Swan views 2012 as a “mirror image of 2011”, noting that, while the year is starting at a point of weakness, “stability will come by mid-year,” assuming a “muddle through” global assumption, whereby crisis is avoided.

In contrast, 2011 began amid an environment of moderate growth, with inflation being a key point of stress. Central banks tightened quite aggressively and, by mid-year, the situation in Europe had deteriorated while inflation remained sticky in many countries around the region. Swan notes that monetary policy, driven by inflation, is a key determinant of PE [price/earnings] multiples. Consequently, with a tight monetary policy, earnings downgrades began to feed through. He cautions that the effects of liquidity tightening in the second half of 2011 have yet to fully filter through.

The Credit Suisse report notes that government revenues for India are only 45 percent of fiscal year 2012 targets in the first eight months of the year, versus a 14-year average of 54 percent - annualizing the figure would result in a fiscal deficit of 6.5 percent. “Higher bond yields and low GDP growth have historically meant low P/E multiples”, the report adds. In contrast to India, China has ample room for policy response with many expecting further monetary policy easing by the end of the first quarter, combined with supportive fiscal policy measures.

India is one of a number of countries in the region facing increased political risk for 2012, with presidential elections in July. A number of asset managers have identified rising political risk as a theme in their outlooks for 2012.

The Assest.com

Failure to impose real market prices interrupts the supply of petroleum products

By DEBESH ADHIKARI

Despite the release of Rs.1.5 billion as a loan by Nepal Provident Fund and other banks to Nepal Oil Corporation, the smooth supply of petroleum products seems to be far away.

Nepal Oil Corporation is selling petroleum products incurring a huge loss. According to NOC, it is incurring Rs.1.07 loss per liter on petrol, Rs.17.84 on diesel, Rs.7.07 per liter on kerosene and Rs.431.47 every cylinder (14.2 KG) of LPG. NOC is however making a profit from aviation fuel to the tune of Rs. 12.89 per liter from domestic airlines and Rs.27.50 per liter from international airlines.

Annually, Nepal Oil Corporation imports petroleum products worth of Rs. 85 billion rupees and it is one of the biggest products imported for domestic use.

Due to absence of fuel, along with the normal lives, industrial, transportation, tourism and education sectors are also adversely affected.

Nepal Oil Corporation (NOC), the monopolist in the petroleum market, should be blamed along with the Minister for Commerce and Supplies for the current crisis. NOC, an already troubled company which has been facing losses on the sales of fuels except for petrol and air fuel, has not been able to pay enough money to Indian Oil Corporation (IOC).

According to acting managing director of NOC, Suresh Kumar Agra, an uninterrupted supply of petroleum products is impossible without increase in the price of petroleum.

Due to the reluctance of governmental and non-governmental organizations to provide any loan to NOC, to ease the supply, government has decided to provide loan to the corporation from Employees’ Provident Fund (EPF). NOC signed NRs 1.5-billion loan agreement with the (EPF).

With this the government has taken a big risk by putting on stake the hard earned money of around 4 lakh and 60 thousand government and non-government employees, and the supply situation will slip back again.

The only option for the government is to adjust the petroleum products at par with the international market.