Chinese shifting attention to US stock markets

An increasing number of Chinese investors are putting their money in US stocks because of the strong performance of the US stock markets, the underperformance of the Chinese exchanges and relaxed rules on investing outside of China.

Liu Yihang is a financial adviser who has worked in the Flushing area of the New York borough of Queens for seven years, home of the city's second-largest Chinatown. He said more and more Chinese investors are disappointed by China's stock market and are shifting their attention to US stocks.

"My clients almost doubled during the past year," said Liu. "Even though China hasn't opened the door for domestic individuals to directly invest overseas."

Bi Caihong, a 55 year-old resident of Beijing who asked that her last name not be used, said that she started to invest in US stocks this year and that it is the best way to spend family savings.

"It's hard to invest in China, as the interest rate is low, real estate costs too much, and since the financial crisis hit China in 2008, the A-share market is unstable and so hard to predict," said Bi.

Snowball Finance, which runs two of China's largest social-media sites for investors buying US stocks, said the number of US stock traders in China is about 300,000, and more than 37 percent of A-share investors would like to open a US stock-trading account.

Boosted by strong economic performance, the US stock market has been one of the best performers in the world. The Dow Jones Industrial Average has increased by more than 13 percent so far this year. At the same time, China's stock market has maintained its sluggish trend, falling by more than 10 percent.

In May, China's State Council allowed individuals to make direct investments outside the country as part of economic reforms for this year.

Chinese investors who want to invest in US stocks must now trade through Hong Kong or open accounts directly through the websites of US stocks with a broker's help.

Liu said the process is inconvenient but doesn't stop Chinese brokers from trading on US stock exchanges.

"The number of Chinese traders increased so quickly that I am planning to hire an assistant just for this part of business," said Liu.

The surge of Chinese investors in US stock exchanges is not only bringing changes to individual financial advisers like Liu, but also has affected US retail brokerage firms, like Scottrade, which are offering 24-hour Chinese hotline services and websites translated into Chinese.

In July, Nasdaq OMX and the largest Chinese Internet portal Sina Corp agreed to provide real-time quotes of US stocks on Chinese websites to help Chinese investors make timely decisions.

Liu said more and more Chinese companies are listing their shares on US stock exchanges and that is another incentive for Chinese traders to try their luck in overseas markets. "Most of my clients prefer to buy US-listed Chinese firms' stocks," he said.

Yu Wei in San Francisco contributed to this story.

haidanhu12@chinadialyusa.com

Mark Mobius hasn't given up on India

For investors who got a setback from the steep correction on the last few trading day of the August 2013, here is some reprieve. It seems not every investor is heading for the door. Certainly not the ones with their eyes fixed on the sound fundamentals of select Indian companies. And Mark Mobius is one of them. The emerging markets fund manager at Franklin Templeton Investments is not willing to call it quits yet. On the contrary, in an interview to CNBC, Mr Mobius has cited his willingness to stay put in India.

Despite the state of economy and the rupee, the fund manager has not lost hope in Indian equities. Mobius, in fact, believes that markets are overreacting to QE tapering talks. Volatility in Indian markets, as with most markets globally, is here to stay. However, there is no reason for investors to quit stock markets. Having said that, it has never been more pertinent to be extremely selective about the stocks in one's portfolio.

Mobius himself has acknowledged that he is keeping a close watch on India's economic variables. He does believe that valuations already discount a possible downgrade in India ratings. However, one cannot help being careful about an economy where the government has not delivered for too long. What is also enthusing is Mobius' assurance about foreign investors wanting to re-enter Indian markets. Few reforms and political will could make all the difference.         

The great 'Onion' paradox

The way that onion prices have been soaring up in recent times, the vegetable has become the subject of numerous jokes. But it has also brought tears into the eyes of the common man who is already reeling under the pressure of high inflation. In fact onion has been a main cause for higher food inflation. This has become a worrisome factor for everybody including the government. Given the strong public reaction to high onion prices, state governments are now scrambling to come up with measure to curb the same. But they seem to be completely ineffective as they are still not addressing the root of the problem.

As per The Mint, the increase in onion prices has little to do with the seasonality factor. It is more of a structural issue. You see in Maharashtra, the largest onion producer of the country, prices are controlled by the traders. These traders have typically formed a cartel and this ensures that prices of the commodity remain under their control. These cartels have been able to exert considerable political influence to ensure that their interests remain protected. They ensure the absence of genuine competition in the markets. In addition the transaction charges by the cartel's middlemen have led prices to remain high. What the government needs to do is to free up the commodity markets all over the country to ensure healthy competition. This would do away the need of the middleman which would help the prices stabilise in the long term.     

Euro zone seeing better times?

First there was news that the US economy is on a recovery path. Then came another surprise from across the Atlantic where the Euro zone recession may also be finally coming to an end. And now it appears that the Chinese economy too appears to be stabilising after a pronounced slowdown in the first half of 2013. So, is the world suddenly out of the mess it found itself in during the sub-prime crisis? The news flow we just highlighted does point towards that direction. However, the most important question is whether the growth has come about on its own? Certainly not. Enormous amounts of money have been printed across the world to bring the economies back on track. And as soon as this process starts winding down, we would be back to square one we believe.

Thus, the hope of the policymakers that the recovery would be able to stand on its own once some kind of support is given to it is proving to be totally wrong. May be they should try a new approach now. They should totally stop their intervention and instead let market forces do their work. This would ensure that leveraged, uncompetitive firms don't survive and will in turn lay the ground work for a fresh round of sustainable growth. Is anyone listening?     

Is India's forex crisis akin to the one in 1991?

With India's widening current account deficit and dwindling forex reserves, it is quite obvious that one would be tempted to compare the current situation with the crisis faced in 1991. As you would recall, India was on the verge of defaulting on its sovereign debt owing to very low forex reserves. At that time, India was left with forex reserves that were enough to cover just 15 days of import bills. It was only after India pledged gold with the International Monetary Fund (IMF) that we were rescued from bankruptcy.

Currently, India has forex reserves of about US$ 280 bn. This amount would cover about seven months of our import bills. While this is not as bad as it was in 1991, it is the lowest import cover since 1996. And also the lowest among BRIC nations! And the Indian rupee has been falling sharply against the US dollar, making new all-time lows. It goes without saying that there is a lot of panic in the financial markets. Indian share markets have been falling. Foreign investors are pulling out of India. So this has put the government and the RBI in damage-control mode. Prime Minister Manmohan Singh has been asserting that the current situation is not akin to 1991. World Bank chief economist Kaushik Basu has seconded the PM's opinion. As per him, India has enough forex reserves and it wouldn't have to go to the IMF again for a rescue.

Well, that's fine, but does that make this crisis any less worrisome? We believe the current adverse scenario is not just a temporary passing phase but a reflection of all our inadequacies and incompetence as an economy. Temporary fixes are not going to do us any good. If we really want to grow and compete in the global economy, we need radical changes.    

Chinese banks outsmart regulators

The non performing assets of Indian PSU banks have been a staple feature of financial publications over the past few months. The bad loans have nearly doubled in absolute value over the past 12 months. Even as a percentage of total loans, the ratio is heading closer to the levels seen in 1992-93. Hence there is every reason for the banks, the regulator and investors to be worried. Thankfully, the RBI has done a good job of at least ensuring that reporting of such financial distress is regular and transparent. Even the banks that tried to hide restructured assets under the carpet could not get away. The RBI ensured that they pay the penalty by providing more for the slippage on such loans. 

The Chinese banking regulator, however, does not seem to be having much success. As per Wall Street Journal, the Chinese banking regulator has been squeezing liquidity for months. This is to ensure that the banks do not indulge in unwarranted high risk lending. But it seems the banks have outsmarted the regulator. By window dressing the loans to risky corporate as less risky loans to banks, the entities managed to skirt lending limits. As much as 2 trillion yuan (US$ 326 bn) have been lent under such transactions. Even the claim that the quality of loan in Chinese banking sector is sanguine has no takers. In fact, as per rating agencies, the Chinese banking sector is sitting on a ticking time bomb of NPAs. Given the size of Chinese banking sector, once can only hope that the banking crisis does not evolve into a global one.        

Will the crude oil hit US$ 150 on Syria?

As per an analyst at France based multinational bank Societe Generale , the brent crude price is likely to touch US$ 125 per barrel in case US unleashes military attack on Syria. This further comes with odds of crude going as high as US$ 150 per barrel in case other Middle East economies get involved. Interestingly, when it comes to oil, the negative speculations are as impactful as the event itself. That other OPEC member like Saudi Arabia could ease supplies if needed does not seem to be helping the oil prices. Already the Brent crude futures for October have hit six month high. 

All this doesn't bode well for India. Rising crude prices along with falling rupee is likely to inflate the fuel subsidy bill. That too at a time when the Indian economy stands vulnerable and can't afford further burden on the fiscal front. The Government had announced diesel price reforms some time back that lent some hope to the bleeding oil and gas sector. However, all optimism has been watered down in the face of ongoing events. The recent reforms are rushed and an outcome of desperation. They are too little and too late to salvage the sector or the economy. Things might have been better if the Government had taken timely steps to make India more energy self sufficient.    

Food Security Bill - Boon or Bane?

The Food Security Bill has been tabled and passed by the Lok Sabha or the lower house of the Parliament of India. From here the bill will move to the Rajya Sabha or the upper house and then go to the President for the final signature. Once the signature is secured then this becomes the law of the land. There has been quite a furor in the media about this bill, is it good, or is it bad? Let’s see what this means for us:

What is the bill all about anyway?

The Food Security Bill has been tabled with the noble intention of providing food grains to the poor of India at very subsidized rates, so that even someone who is below the International poverty line (earning less than $1.25 a day –according to the World Bank, 2008)
The bill aims to provide subsidized food grain to around 67 percent of India's 1.2 billion people*. As per the provisions of the bill, beneficiaries would get rice at Rs 3/kg, wheat at Rs 2/kg, and coarse grains at Rs 1/kg. These rates would be valid for three years. Every pregnant woman and lactating mother would get free meal during pregnancy till six months after child birth. They will also get a maternity benefit of Rs 6,000 in installments. Children up to 14 years would get free meals. In case of non-supply of food grains, states will have to pay food security allowance to beneficiaries.*

The Good

Is,of course, the intention. India is home to approximately one-third of the world’s poor with approximately 70% of the population living at less than $2 a day*. Given the exchange rate and the beating that the rupee has taken to the dollar, this number would have swelled. The plunging value of the Rupee is another evil plaguing the system which we will not discuss now. Coming back to the topic, with such a large percentage of the population living in such conditions it would only be humane to provide food grains to them at subsidized rates, given the fact that food grain production is at a high and most of it is going waste due to poor infrastructure. The wastage of precious food grain and the plight of the farmer is another evil plaguing the system which we will not discuss now. It is definitely a better idea to distribute this to the poor than to let it rot and spoil.
The idea also is that if the poor are well fed then schemes like the NREGA (National Rural Employment Guarantee Act) will benefit, a fit worker will work more and harder leading to an overall rise in rural productivity. Sound logic.

The Bad

Is, of course, the intention. If the intention was to feed the poor then why wasn’t this bill passed a year or two ago. Why pass it on the cusp of the elections to the Lok Sabha? A vote gathering tactic? Or genuine concern, the interpretation is yours, dear reader.
There can be another argument that giving away free food is fine but what does one do when people realize that they don’t need to work hard for food and the government is providing them with what they need. They may stop being productive and become lazy. And will they stop at food? They may demand free clothing and free places to stay. What prevents the Government, four years hence, to come up with a clothing security bill? Or a “Right to own a Television” bill? Where do we draw the line? Food for thought, isn’t it (please pardon the pun, dear reader!).
Then there is the question of the track record of this Government, which has been absolutely wonderful given the spotless record of its members and the wonderful ability to execute all plans to perfection, the future seems bright! Please pardon the sarcasm, dear reader, with scams abound can we genuinely believe that the right amount of grain will reach the right people? Again something which we will not discuss now.
Do we have the infrastructure to ensure that the food grain is properly distributed? What will we use? Trucks, Trains? With burgeoning diesel prices and poor power infrastructure, can we assure all those poor people that the food grain will reach them? Can the Government bear subsidies on food and diesel? Unanswered questions these.

And The Ugly, oops meaning the Numbers

Coming to the crux of this issue. With no balance in the balance of payments, will adding this huge cost help the Government in any way? A closer look at the numbers below:
Number of people living below the poverty line in India - 68.7% of the population of 1.2 billion (according to Wikipedia). That works out to 824 million people who, according to the bill will get 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively. To put things in perspective the population of the US stands at 300 million, Brazil at 193 million and Indonesia at 237 million (these are the world’s most populous countries after China and India). Source: Wikipedia
The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. The Commission for Agricultural Costs and Prices (CACP) of the Ministry of Agriculture in a research paper titled National Food Security Bill – Challenges and Options puts the cost of the food security scheme over a three year period at Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs. 2,41,263 crore. Another economist writing for The Indian Express put the cost of the bill at Rs 3,14,000 crore or around 3% of the gross domestic product (GDP)#.
In order to properly understand the situation we need to express the cost of food security as a percentage of the total receipts (less borrowings) of the government.
The receipts of the government for the year 2013-2014 are projected at Rs 11,22,799 crore. Food security will also mean a higher expenditure for the government in the days to come. The government’s estimated cost of food security comes at 11.10% (Rs 1,24,723 expressed as a % of Rs 11,22,799 crore) of the total receipts. The CACP’s estimated cost of food security comes at 21.5% (Rs 2,41,623 crore expressed as a % of Rs 11,22,799 crore) of the total receipts. According to the Indian Express on July 6^th, 2013, the cost of food security comes at around 28% of the total receipts (Rs 3,14,000 crore expressed as a % of Rs 11,22,799 crore)#.
Once we express the cost of food security as a percentage of the total estimated receipts of the government, during the current financial year, we see how huge the cost of food security really is. This is something that doesn’t come out when the cost of food security is expressed as a percentage of GDP. In this case the estimated cost is in the range of 1-3% of GDP. But the government does not have the entire GDP to spend. It can only spend what it earns.

Conclusion

While the intentions behind the Food Security Bill are good, it has clearly not been thought through by the people pushing the bill and will become another major drain on the exchequer of the nation. Instead of dolling out freebies to the people, the Government should come up with long term measures that will genuinely bring people out of poverty and make them more prosperous, rather than engaging in measures that are costly, short-term and can have a backlash which we cannot even envisage.

*- Source - Wikipedia
#- Source – Firstpost.

Importance of foreign investments in India

Recently crowned as World’s 3^rd largest economy by the Organisation for Economic Cooperation and Development (OECD), is the Indian economy already trembling?

The financial crisis in global markets has made the outlook of Indian economy grim. While the consistently volatile markets and the rupee plunging to an all-time low against the USD are some major concern at this moment, natural calamities and economic scandals seem to be the icing on the cake. Two decades ago, in the early 90’s, India faced a similar crisis. At that time India’s major concerns were the problem in balance of payments and poor foreign exchange reserves.

During the crisis, Dr. Manmohan Singh, the Finance Minister of India at that time, came up with a solution to reform the Indian economy. He liberalized the economy by ending the license raj and gave rise to the phenomena of foreign investments in India. Thus, opening the gates for foreign players to come and invest in India.

*License Raj: A term used to describe the regulation of the private sector in India between 1947 and the early 1990s. In India at that time, one needed the approval of numerous agencies in order to set up a business legally.

Since then, foreign investments have been the backbone of the Indian economy and like the 90’s this time too, it would seem that foreign investments might be holding the magic wand that may be able to pull India out of the current economic slump.

Foreign investments are flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. There are two types of foreign investments that play a major role in the growth of Indian economy; Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII).

FDI Inflows into India
*Data from Financial Year 2000-01 to 2012-13 (up to January 2013) Source data: Website of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India

FDI

Foreign Direct Investments (FDI) is investment of foreign assets into domestic structures, equipment, and organizations. FDI inflows are into the primary market and do not include foreign investments into the stock markets. It is a long-term investment and is used by the developing countries as a source of their economic development, productivity growth, to improve the balance of payments and employment generation. Its aim is to increase the productivity by utilizing the resources to their maximum efficiency. Exit is relatively difficult in this phenomenon.

FII

Foreign Institutional Investments (FII) denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. It is generally a short term investment and invests only in the financial assets. FII inflows are only into the secondary market with an aim to increase the capital inflows. Exit is relatively easier in FII.

While both the type of foreign investments are important for India but for a long term economic growth, Indian government should focus on FDI as compared to FII. As it has been proved that due to low exit barriers in FII, the foreign investors can exit from the Indian market whenever they want resulting in a crash in the Indian stock markets.

This calendar year as of (May - 2013) (source: PTI) India had received an FII inflow of more than $ 15 bn and the FII outflow for the month of June and July had already crossed $ 10 bn, resulting in an uncertainty in the markets. This clearly shows that FII inflows are not sustainable and can be redeemed anytime according to the will of the FIIs and the situations prevalent in their home countries.

So to prevent this uncertainty, it becomes necessary that the foreign money which comes to India should stay here for an adequate time, so that this money could help to promote economic and industrial  development. This can only be achieved if the money comes via FDI route.

The Foreign-direct investments were seen sliding about 21% last fiscal. This is despite, the government passing a law in September 2012, allowing big retailers to open stores directly, yet none of the foreign dream-merchants have really taken the bet. Reasons being too many prerequisites, constraints on whom goods can be purchased from, a raft of regulations limiting franchise models and factory construction, and the infuriating need to negotiate separately with each of the states.

However the recent announcements by the government of India on 100% FDI in telecom & defence sector, 100% FDI in single brand retail & 51% FDI in multi brand retail and 49% FDI in Insurance give us some ray of hope for the economic development.

Moreover though this could be temporary slowdown or reversals in FII and FDI inflows based on interest rate cycles, flow of funds, global contagion etc, over the long term, given the nascence of many Indian businesses, the growth potential and 1.2 billion people pining for a taste of globalization, one could expect a kick-start of inflows in near future. 

Buy L&T on dip, Reliance may fall further: Anu Jain

nu Jain, Director - Equities at IIFL Private Wealth Management told CNBC-TV18, " Reliance Industries  to be the one which can fall more if the markets were to give up from here. It has held on to those Rs 840-845 levels and broken down that, closed at Rs 825 on Friday. Now that Rs 795-800 levels is a support zone for it."

"If the markets were to stay weak and it were to test those levels and break that then you would have a fall which could take it right down to about the previous lows and may be slightly lower. Till now it was an outperformer," she said.

Jain further said, "The strong support is at Rs 795. It is definitely possible for that Rs 30 which is about 3.5 percent from here to go off on a day like this or may be one more day. It is Rs 795, which is crucial as to how it holds up, the next level would be Rs 770."

"On the other hand at about Rs 750, Larsen and Toubro  (L&T) is looking extremely oversold. I think you can get it down up to Rs 730, but those would be levels to accumulate. So given further short call even if the market was to go weak on L&T seems to be unlikely. The lower levels will be levels to accumulate L&T even though the whole sector is negative. So Reliance may give up, L&T should be a buying opportunity on lower levels," she said.