The Oncoming Burst of the China Credit Bubble

History has proven that credit bubbles always burst. China by far is the biggest credit bubble in the world today. We lay out the proof herein. There are many indicators signaling that the bursting of the China credit bubble is imminent, which we also enumerate. The bursting of the China credit bubble poses tremendous risk of global contagion because it coincides with record valuations for equities, real estate, and risky credit around the world.

The Bank for International Settlements(BIS) has identified an important warning signal to identify credit bubbles that are poised to trigger a banking crisis across different countries: Unsustainable credit growth relative to gross domestic product (GDP) in the household and (non-financial) corporate sector. Three large(G-20) countries are flashing warning signals today for impending banking crises based on such imbalances :China, Canada, and Australia.

china credit bubble

The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capi
tal inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.

Post the 2008 global financial crisis, the world’s central bankers have kept interest rates low and delivered just the right amount of quantitative easing in aggregate to levitate global debt, equity, and real estate valuations to the highest they have ever been relative to income. Across all sectors of the world economy: household, corporate, government, and financial, the world’s aggregate debt relative to its collective GDP (gross world product) is the highest it has ever been.

Central banks have pumped up the valuation of equities too. The S&P 500 has a cyclically adjusted P/E of almost 30 versus a median of 16, exceeded only in 1929 and the 2000 tech bubble. The US markets are also in a valuation bubble because US-owned financial assets have never been more richly
valued relative to income as we show below. The picture is equally frothy if we include real estate, also at record valuations to income. China’s capital outflow spillover from its credit bubble has driven up real estate valuations around the world.

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Eurozone inflation returns to zero

Inflation in the eurozone returned to zero in October from September’s -0.1%. Price growth in food, alcohol and tobacco increased slightly, while energy prices were still considerably lower than last year, according to Eurostat estimates. The statistics agency also estimated the unemployment rate in the 19 countries that use the euro was 10.8% in September, down from August’s 10.9%. The rate for the 28 EU members was 9.3%, down from 9.4% the month before. The eurozone rate is the lowest since January 2012 while the rate for the whole EU is the lowest since September 2009.

eurozoneGreece had the highest rate at 21.6% (Greece is expected to be higher but has yet to report September figures), while Germany had the lowest at 4.5%. The inflation figures are an early, flash estimate from Eurostat and so are not broken down by member state. It does give broad indications of which groups of products have gone up or down.
Food, alcohol and tobacco prices were estimated to be rising 1.5% in October, compared with 1.4% in September.
Energy prices were falling an annual 8.7%, compared with 8.9% a month earlier. And the price of services were up 1.3% compared with 1.2% the month before. Mario Draghi, president of the European Central Bank, suggested this month that he might be prepared to extend the bank’s programme of quantitative easing given the low levels of eurozone inflation. “Although today’s inflation and unemployment data for the eurozone revealed small improvements, they are still very weak by past standards, suggesting that the ECB cannot afford to delay increasing its policy support much longer,” said Jessica Hinds, European economist at Capital Economics.

  • BBC


Short of Workers and Consumers, China Abandons One Child Policy

China ended one of the most ambitious demographic experiments in human history, abandoning the limit of one child for most families to foster the population growth required by the world’s second-biggest economy. Introduced by Deng Xiaoping in 1979 to husband a then-impoverished nation’s scarce resources, the baby limit now threatens to undermine growth: the working-age population shrank last year for the first time in two decades and the cohort of senior citizens is projected to grow rapidly.  The Communist Party’s Central Committee’s decision to allow all couples to have two children was disclosed by the Xinhua news agency, citing a communique released at the end of a four-day party policy meeting in Beijing. A previous effort to relax the policy fell well short of the goal of boosting births by 2 million a year. “It shows the party wants to take action as soon as possible, and shows there is no time to delay for China to modify its population policy,” said Wang Yukai, a professor at the Beijing-based Chinese Academy of Governance. “They couldn’t wait for the legislation to pass next year. The leaders want the new policy now.”

one child policyThe changes are part of President Xi Jinping’s blueprint to manage the economy’s shift to slower, more balanced growth. The new five-year plan represents Xi’s best chance to implement social and economic reforms outlined since he took power in 2012 and avoid falling into the “middle-income trap” of stagnation. China is trying to complete its transition from a investment-and-export-dependent developing nation to a “moderately prosperous society” with an economy powered by services, consumers and innovation. Xi has said the China needs to accept a “new normal” of slower expansion after three decades when growth averaged about 10 percent. The five-year plan “is the decisive phase for achieving a moderately well-off society,” the Central Committee said. Demonstrating Xi’s interest in the plan, the president personally presented its details to the committee. Xi has defined the phrase to mean a doubling of GDP and per capita income over the decade through 2020. Shares of France’s Danone SA, one of the world’s biggest producers of baby formula, rose as much as 3 percent to the highest since April after the changes in family-planning policies were announced. Procter & Gamble Co., maker of Pampers, added as much as 0.4 percent. The “one-child” policy, which limited couples to one or two children depending on ethnic background and where they live, was a cornerstone of late leader Deng’s effort to build an economy ruined by decades of war and the ideology-fueled reign of Communist Party founder Mao Zedong. When the policy was adopted, the thinking was that the birth rate of almost 3 children per woman was a drag on growth.

Since then, China’s population has grown to about 1.36 billion, almost 20 percent of the world’s total, up from about 930 million in 1976. India, with about 1.3 billion people, is projected to pass China within the next decade, according to World Bank forecasts. After decades of discouraging people from having children, the challenge is changing the mindset of potential parents worried about the costs of expanding their families. Only 1.1 million of the 11 million couples eligible to have second child under a previous policy relaxation in December 2013 applied for permission, according to Xinhua. Allowing all couples to have two children could add 3 million to 8 million births annually, according to Huang Wenzheng, a demographer at Johns Hopkins University in Baltimore. The communique said the government would continue to manage family planning decisions, despite the relaxation. The Central Committee’s communique marks the first step in the official roll-out of the 2016-20 blueprint. More details are expected in coming days with the release of the draft plan, which won’t be completed until the national legislature approves it next year.
The plan — a Soviet-style holdover of the centrally planned economy — guides China’s policies on everything from health care and family-planning to steel production and technology research. It also gives the leadership an opportunity to reassert its commitment to market-based reform after rescuing indebted local governments and a plunging stock market earlier in the year. Among other things, the party is seeking to eradicate poverty as defined under current standards, lifting the country’s remaining 70 million poor people above the poverty line by the end of the decade, according to the communique. It wants to boost social programs, reduce price controls and institutionalize Xi’s anti-corruption campaign.

The plan would call for making China an Internet powerhouse and carrying out what it described as a nationwide “big-data strategy.” It emphasizes green growth and promoting Xi’s “One Belt , One Road” infrastructure and trade initiative.

  • Bloomberg


A Made-in-China Diwali

China surely knows how to make its presence felt in Indian markets, and Diwali is no exception. Cashing in on Indians’ attraction to anything that is cheap, Chinese products as Diwali gifts have seen a surge in demand by 45%, according to a survey undertaken by the Associated Chamber of Commerce and Industry (ASSOCHAM). Consumers are making a beeline to buy Chinese fancy lights, lampshades, Ganesha and Laxmi idols, crackers and other such various items. Seventy-eight per cent of those surveyed said Chinese lights are almost 50% cheaper as compared with Indian lights and have more variety to offer.

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As a result, the worst-hit are local artisans and traders. According to DS Rawat, secretary general, ASSOCHAM, about 72% traders said demand for earthen diyas has been dipping year after year as consumers prefer Chinese-made fancy lights. “A Chinese string of 100 tiny bulbs can be bought in the range of Rs40-60. Lights in the shape of pineapples, pomegranates, rice and net stars among others are seen to be popular among buyers,” rued traders. Riding on the same features of variety and affordability, Chinese crackers are also finding more and more takers this Deepavali season. About 82% of wholesalers said Chinese crackers are more colourful, produce more sound and have a lot of variety and they are cheap too and score over their Indian counterparts.

Pic source: Hindu

However, Rawat pointed out that these products are entering the domestic market illegally, through Nepal. “Indian traders lose about Rs1,800 crore. Chinese fireworks worth around Rs250 crore are circulating in the Indian market and volume could increase if necessary steps are not taken,” he said. The Indian fireworks industry employs about 2.5 lakh people.

News source: DNAIndia


'Muhurat' Trading on Bourses to be for 75 Minutes this Diwali

The “muhurat” trading session will be conducted for 75 minutes on the Diwali day, November 13, on leading bourses NSE and BSE. The special trading session would be conducted to pay obeisance to Lakshmi, the Hindu goddess of wealth and prosperity. It would also mark the New Year for traders as per the Hindu calendar, or Samwat 2069.

Pic source: Rediff

The tradition of muhurat trading dates back over a century. Trading would be conducted between 1545 hrs and 1700 hrs on the day, as per information available with the exchanges. Earlier, the exchanges had announced that muhurat trading session would be for 45-minutes. The tradings would be done in segments like capital market, future and options and stock lending and borrowing (SLB). Last year, bourses had held the trade between 1645 hrs and 1800 hrs.

News source: Economic Times


Convention on Avoidance of Double Taxation Amended by India and UK

India and the United Kingdom (UK) have made amendments to the convention on avoidance of double taxation, by signing a protocol. The pact will streamline the provisions on partnerships and dividends, besides enhancing the information flow between tax authorities of the two countries. The pact was signed by Mr Jaimini Bhagwati, High Commissioner of India to the UK, and Mr David Gauke, Exchequer Secretary to the Treasury. The pact relates to the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.

Firms partnering with UK would benefit from the amendment. Further, the withholding taxes on the dividends would be 10 per cent or 15 per cent and would be equally applicable in the UK and India. Post the amendment, the convention will provide tax stability to the residents of India and the UK and will facilitate economic cooperation between the two nations. It will also encourage the flow of investment, technology and services.

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The pact incorporates the provisions for effective exchange of information between the tax authorities of the two countries in line with latest international standards, including exchange of banking information and supplying of information irrespective of domestic interest. It also provides for sharing of information to other agencies with the consent of the supplying state. The pact further includes the anti-abuse (limitation of benefits) provisions to ensure that the benefits of the convention are not misused.

Further, both the countries would enter into memorandums of understanding (MoUs) to expedite exchange of information and assistance in collection of taxes.

News Source: IBEF


NSE Chief to Head World Federation of Exchanges (WFE)

Ravi Narain, managing director and chief executive officer (CEO) of the National Stock Exchange, is set to take charge as chairman of the working committee of the World Federation of Exchanges (WFE).  At its annual meeting in Taipei, WFE elected Andreas Preuss, Deutsche Börse AG’s deputy CEO, as WFE chairman. Thomas A Kloet, chief executive of TMX Group, would be vice-chairman of WFE’s working committee.

Preuss, who would succeed Hong Kong Exchanges and Clearing’s Ronald Arculli, would hold the post for two years. He takes charge at a time when the business model of stock exchanges across the world is seeing structural changes – competition has intensified and the regulatory framework is swiftly evolving. Key strategies global exchanges are pursuing include bringing the over-the-counter (OTC) market on their platforms. The Singapore Stock Exchange has already cleared OTC derivative products. Other priorities for exchanges include partnerships on various fronts like cross listing of products and technology.

“Changes to regulatory frameworks around the world have led to considerable structural changes in our business. As exchange organisations, we can further improve how we articulate our roles as market organisers and communicate our importance for the real economy,” Preuss said. “Close consultation and cooperation between regulated exchanges is essential if our voice is to be heard by policymakers and regulators. I am, therefore, looking forward to working with the WFE as a globally recognised and influential exchange organisation,” he added.

Hüseyin Erkan, chairman of the Istanbul Stock Exchange, would take charge as CEO of WFE, while Peter Clifford would be chief operating officer. The WFE plans to use its vast network of exchanges to promote a consistent and engaging dialogue on pressing market issues across the world.

News source: Rediff


NRIs Beat FDI, Keep the Money Coming

Remittances or private money transfers from non-resident Indians (NRIs) have been rising steadily despite a slowdown of the global economy and have become a more reliable source of funds for many Indian families compared with the tangible volume and benefits of foreign direct investment (FDI). Official data for the past three years show that while FDI inflows fluctuated and even dipped, inward remittances were upwardly mobile.

In 2011-12, NRI remittances were $66.13 billion ( Rs. 3,42,884.05 crore), against an FDI inflow of $46.84 billion into the country. Inward remittances have been on an upswing over the past three years, unaffected by factors, such as a fragile global economy and boosted by a falling rupee, of late.

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The Gulf countries (West Asia) and North America are the two top sources of remittances to India, with Europe placed a distant third. A Reserve Bank of India study finds that 30.8% of total foreign remittances came from West Asia, while 29.4% came from North America and 19.5% came from Europe. The study also said that 40% of all such remittances were used for household expenses. These remittances now account for around 4% of gross domestic product (GDP).

Kerala, Tamil Nadu, Punjab and Uttar Pradesh are among the top remittance-receiving states in India. In 2011, remittances to Kerala clocked R49,965 crore, accounting for 31.2% of its GDP, according a Kerala Migration Survey, conducted by the Centre for Development Studies (CDS) for the ministry of overseas Indian affairs. In other words, remittances were more than six times the money Kerala gets in Union government assistance. According to World Bank estimates, in 2011, the other major inward remittance beneficiary countries were China ($57 billion), Mexico ($24 billion), the Philippines ($23 billion), and Pakistan and Bangladesh ($12 billion each).

However, compared with the Indian official figure, the World Bank’s figure for India was $58 billion. Although, the amounts are different in the two estimates, India tops the chart for top remittance-receivers in the word. The Indian official figure states that remittance to the country was $55.62 billion in 2010-11, which rose from $53.64 billion in 2009-10. When compared with remittance figures, there was no great cheer on the FDI front in 2010-11. That year, India received an FDI of $34.84 billion, which was lower than the corresponding figure of $37.74 billion in 2009-10, according to data from the industrial policy and planning department.

Government officials also say a depreciating rupee and higher interest rate for deposits are driving NRIs to park more of their money in the country. “The interest rates our banks offer are more than that of developed countries and even the Gulf countries, where over six million Indians work,” an official said. S Irudayarajan of CDS, an expert on migration studies, says, “This trend of rise in remittances is here to stay. Indians prefer to park their money back home, which they find a very safe option. The falling rupee has also been a windfall for them.”

News source: Hindustan Times


India, Australia May Sign Nuclear Pact

Australian Prime Minister Julia Gillard, whose bold move overturned a longstanding ban on uranium sale to India, comes here Oct 15 on a three-day visit that could see India and Australia sign a landmark civil nuclear pact. Gillard’s visit takes place months after a reversal of Canberra’s long-standing policy by the ruling Labour Party on supply of uranium to India, paving the way for the sealing of a civil nuclear deal that could have a force-multiplier effect on broader ties both bilaterally and regionally. The agreement on civil nuclear cooperation is likely to be signed during the visit, well-placed sources told IANS.

The negotiations are, however, set to go down the wire as Australia will be insisting on a stringent uranium safeguards agreement and greater access to Indian nuclear facilities to inspect safe use of uranium supplied to India. Australia will be looking to optimise the bargain as the leadership will have to sell the deal to the non-proliferation hawks who are firmly opposed to any uranium deal with a country which has not signed the Nuclear Non-Proliferation Treaty (NPT).

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If the negotiations succeed, the India deal will be the first country-to-country agreement by Australia to sell the yellow cake to a country outside the ambit of the NPT. A host of factors, including the state of cash-strapped Australian uranium mining industry, has, however, brightened the chances of such a nuclear pact. With the global slowdown set to be prolonged, Australian uranium companies like Paladin, Toro and Energy Resources of Australia are pitching for the nuclear deal with India as it will bring them millions of dollars in business.

Australia has the world’s largest deposits of uranium, but it is only the third-largest supplier at about 7,000 tonnes per year due to high operational costs. The India deal could, therefore, prove a godsend for uranium mining companies in Australia, specially as India, unfazed by scepticism about nuclear energy following the Fukushima disaster, is set to ramp up the share of atomic power in the country’s overall energy mix.

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Intensifying trade and investment will be another key theme of Gillard’s India visit. The talks are expected to give a fresh thrust to negotiations on Comprehensive Economic Partnership Agreement which will provide greater market access to Indian exporters of goods and services. Bilateral trade grew to $20 billion last year.

Besides nuclear deal and trade, an array of regional and global issues will also be on the table when Gillard holds talks with Prime Minister Manmohan Singh. Gillard will be seeking India’s support for her country’s bid for a non-permanent seat in the UN Security Council. Amid competing ambitions of the US and China in the Asia-Pacific region, the two sides will be looking to ramp up their cooperation in the 16-nation East Asia summit which the leaders of the two countries will be attending in Cambodia in November.

Hard diplomacy apart, there will be a spot of soft power diplomacy as well, with the two countries launching a three-month long ‘Oz Fest’ during Gillard’s visit which is expected to create new cultural synergy in bilateral ties.

News source: Assam Tribune

Update:  Australia has agreed to supply uranium to India for its civil nuclear plants though it will take 1-2 years for the safeguard pact details to be thrashed out.

Uranium sale to India: Australian PM Julia Gillard safeguard pact may take 1-2 yrs

Defending her move to start talks on supplying uranium to India, Australian Prime Minister Julia Gillard has said the ruling Labor’s previous stance against the sale was becoming an obstacle in ties, but made it clear that a safeguard agreement is likely to take one or two years. Gillard, who is on a three-day visit to India, hosed down any suggestions that uranium sales to India will start quickly, the Sydney Morning Herald reported today.

She said that negotiating a safeguard agreement is likely to take one or two years, rather than months. Gillard, undertaking her maiden India visit as Prime Minister, deflected criticism of future uranium exports and said Australia knew how to negotiate a proper agreement to ensure uranium was used for peaceful purposes. “I think India is a wonderful example of everything we have been talking about as the possibilities of the Asian century,” another newspaper ‘The Australian’ quoted her as saying.

Gillard said she was sure the uranium issue would be raised during her talks with the Indian leadership. The Australian Prime Minister is set to meet her Indian counterpart Manmohan Singh and Congress President Sonia Gandhi during her India visit. Gillard said Australia had negotiated agreements in the past and done so on the basis that its uranium “is only used for peaceful purposes”.

She said the International Atomic Energy Agency would be involved and India would have a protocol with the IAEA in any agreement.

Above news source: Economictimes


Foreign Investment in Insurance Hiked to 49%; Pension Opened Up

In the biggest slew of reform measures in years, the Government went ahead with long-pending financial sector reforms, risking the wrath of political allies and setting the stage for a political showdown at the upcoming Assembly polls in key States. The Cabinet on Thursday hiked the limit for foreign equity investment in insurance companies to 49 per cent. The wording is crucial; as there was no mention of foreign direct investment, the limit may combine FDI and FII investments.

It also paved the way for a major reform of the pension sector by clearing amendments to the Pension Bill and allowing foreign investments in the sector. That was not all. Official amendments to the outdated Companies Act, the largest single piece of legislation in the world, were also cleared, as was an amendment to the Forward Contracts Regulation Act allowing options. Amendments to the Competition Act were approved, though bank mergers were kept out of its purview.

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While India Inc welcomed the reforms push, political opposition to reforms, particularly in insurance, is bound to harden, especially because the Government ignored the views of the multi-party Parliamentary Standing Committee on Finance. However, the Government appeared to have kept some elbow room. This was evident when Finance Minister P. Chidambaram said: “We will sit, discuss and negotiate…. We will reach out to all political parties, especially the principal Opposition party, to get the reform Bills passed.”

He said there have been instances when Bills have been passed, even when the government was in the minority. This was particularly with reference to the lack of required numbers to get the Bills passed in the Rajya Sabha. Meanwhile, Chidambaram clarified that the new decision will not apply to Government-owned companies such as Life Insurance Corporation (LIC) and the five general insurance companies. “The benefit of this amendment will go to the private sector insurance companies which require huge amounts of capital and that capital will be facilitated with the increase in FDI to 49 per cent,” Chidambaram told reporters.

The state-owned general insurance companies and GIC will, however, be permitted to raise capital from the market to meet future requirements, provided the Government’s shareholding does not fall below 51 per cent at any point. To encourage health insurance, the capital requirement for a health insurance company is now proposed at Rs 50 crore (against Rs 100 crore for a general insurance company) to reduce entry barriers to a priority sector in the insurance space. The definition of the ‘health insurance business’ has been revised to clearly stipulate that health insurance policies would cover sickness benefits on account of domestic or international travel.

Further, the period during which a policy can be repudiated on any ground, including misstatement of facts, has been confined to three years from the commencement of the policy. Thus, no policy can be called in question on ground of misstatement after three years.

Pension Bill

The Cabinet also approved five official amendments to the Pension Fund Regulatory and Development Authority Bill, 2011. These official amendments are based on the recommendations of the Standing Committee on Finance. Among these, the provision on assured return is key. The provision says: “The subscriber seeking minimum assured returns will be allowed to opt for investing his funds in such schemes providing minimum assured returns as may be notified by the Authority.”

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The other provision is related to foreign investment limit. It says the foreign investment ceiling in the pension sector, at 26 per cent or such percentage as may be approved for the Insurance Sector, whichever is higher, may be incorporated in the present legislation. Asked whether these Bills will be brought for consideration and passage during the Winter Session, the Finance Minister said the time-table has to be approved by the Parliamentary Affairs Ministry.

News source: Hindu Business Line