Date post: | 25-May-2015 |
Category: |
Documents |
Upload: | investeurs-consulting-pvt-ltd |
View: | 124 times |
Download: | 0 times |
“Sharpen your Perception”
It is not about the bragging rights that come with being one of
the most dynamic economies in the world or the hope of
membership at the global high table as an emerging
superpower, but transformation of ordinary lives, thanks to the
opportunities provided by economic reforms.
Average real incomes have quadrupled since 1991, providing
ordinary Indians a rare opportunity to improve their lot.
Ownership of consumer goods and basic amenities, like,
electricity and education has spread. Once accounting for about
25% of world’s out of school population, India shows higher
aspirations with this figure falling to 10%. UNDP said in its
Human Development Report 2010 that India is sixth in the list of
countries that have rapidly improved its human development
indicators since 1980. Poverty rates have dropped by at least 10
percentage points.
Indians, now, study better, eat better and live better.
We never had it so good!
China is one of the world’s fastest growing economies, with consistent growth
rates of 5% - 15% over the past 30 years. China is also the largest exporter and
second largest importer of goods in the world. China’s rapid rise as a major
economic power is often described as one of the greatest economic success
stories in modern times. From 1979 (when economic reforms began) to 2010,
China’s real gross domestic product (GDP) grew at an average annual rate of
nearly 10%. From 1980 to 2010, China’s economy grew nearly 18-fold in real
terms, real per capita GDP grew more than 13-fold, and hundreds of millions
of people were raised out of extreme poverty. China is now the world’s
second largest economy and some analysts predict it could become the
largest within a few years.
There is little doubt that China's economy will eventually surpass the U.S.,
mostly because of its sheer size -- its population is 1.3 billion, versus just 300
million in the U.S. It became more evident when China took over Japan in
2010.
China is running fast and now has new message for the world – We can help in
time of crises but can China actually save the world or more specifically
Europe from the crisis?
All eyes on
China
With slowdown is US and severe debt crisis in Europe, China rightly seems to be the only hope to give the world economy something of a boost in the coming year.
China’s rapid expansion accounted for more than half of the global economy's growth over the past couple of years and hence seems it can continue playing the
role of economic locomotive. Ironically, the biggest single risk to China's growth would not be from China, it would be a European financial crisis that could damage
credit conditions globally. Such an event could trigger a collapse in Chinese exports, with repercussions for the whole economy.
At the same time, the risk China itself is witnessing cannot be ignored. Uneven economic growth leading to public unrest, inflexible currency, unbalanced economic
development, increasing inflation and distortive banking system supporting inefficient industries are some immediate risks hampering China’s economic growth.
Uneven Economic Growth & Public Unrest
A long-term problem confronting China is the disparity in income and wealth. Every year numerous protests occur in China over a number of issues, including
pollution, government corruption, and land seizures. A number of protests in China have stemmed in part from frustrations among many Chinese (especially
peasants) that they are not benefitting from China’s economic reforms and rapid growth. Thus, income and wealth of the lower economic brackets need to be
raised to transform China from an economy dependent on investment for growth to one in which consumption is the primary driver. Overall, wages remain low,
with the average effective wage in Shanghai at $400 a month. Average GDP per head is also low at $4,300 - only 9% of the level in America. Although GDP per head
is higher in Shanghai, at $12,000, it is still lower in the central and western cities, at $1,000 to $2,000.
Unbalanced Development
China’s GDP growth still relies on capital formation or investment. In
2010, consumption and investment accounted for 37% and 54% of
China’s GDP growth. New investments can be fickle and can
evaporate in a higher interest rate environment or an increased
aversion to risk.
Growing Inflation
Though fast growth has fired up Chiana’s economic engines, but it has
also led to stubbornly high inflation, which threatens to overheat the
economy and undermine the long-running boom that the country has
experienced. From 1994-2010, the average inflation rate in China was
4.25% reaching a historical high of 27.7% in October of 1994 and a
record low of -2.2% in March of 1999. The inflation has been on the rise
since July 2009.
With inflationary pressures staying high, Beijing has been trying to
moderate growth and rein in inflation. During the past six months, the
government has tightened restrictions on bank lending, raised interest
rates, increased agricultural subsidies and even prevented Chinese
companies from raising consumer prices. China is still managing to
sustain strong growth, juggling the risks of an overheated, inflationary
economy on the one hand and too-tight policy that would trigger an
economic bust on the other. Inflation has climbed steadily despite five
interest rate hikes since October 2010 and government curbs on
lending and investment. The inflation has eased to 6.2% in August 2011
but is likely to stay above 6 percent through the September quarter.
With inflationary pressures staying high, Beijing has been trying to moderate growth and
rein in inflation. During the past six months, the government has tightened restrictions on
bank lending, raised interest rates, increased agricultural subsidies and even prevented
Chinese companies from raising consumer prices. China is still managing to sustain strong
growth, juggling the risks of an overheated, inflationary economy on the one hand and too-
tight policy that would trigger an economic bust on the other.
Inflexible Currency
China does not allow its currency to float and therefore
must make large scale purchases of dollars to keep the
exchange rate within certain target levels. Renminbi has
been appreciating since 2005 and expectations of further
gains still remain strong. China’s currency policy has
made the economy overly dependent on exports and
fixed investment for growth and has promoted easy
credit policies by the banks. These policies may
undermine long-term economic stability by causing
overproduction in various sectors, increasing the level of
non-performing loans held by the banks and boosting
inflationary pressures.
Inflation has climbed steadily despite five interest rate
hikes since October 2010 and government curbs on
lending and investment. The inflation has eased to 6.2% in
August 2011 but is likely to stay above 6 percent through
the September quarter.
Distortive Banking System - Support to Inefficient
Industries
China’s banking system is largely controlled by the central
government, which attempts to ensure that capital (credit)
flows to industries deemed by the government to be
essential to China’s economic development, especially
SOEs (State Owned Enterprises). It is believed that
oftentimes, SOEs do not repay their loans. In addition, the
government sets interest rates for depositors at a very low
rate, often below the rate of inflation, which decreases
household income. On the other hand, low Chinese
interest rates greatly benefit Chinese industries. Some
economists claim that this system constitutes a transfer of
wealth from Chinese households to Chinese companies,
which, it is claimed suppresses Chinese consumer demand
and encourages over-production in various Chinese
industries. Such policies are believed to have contributed
to widespread economic distortions in China.
Chinese government is trying to address each risk as it seeks to achieve sustainable economic growth,
which should better combat inflation risks and maintain social stability. Also despite daring predictions
of an imminent China bust by some bearish commentators over the past two years, the economy has
proven incredibly resilient amid significantly tightened domestic monetary policy and escalated global
risks.
However, in spite of all the positives placing any hope on China helping the world economy seems
unrealistic and flawed at this point of time. China is in the same situation as the rest of the world,
weighted down by overproduction, export dependency, overexposed banks, and compressed
consumption. Its success lies on an artificially overvalued yuan and a cheap and un-free workforce.
China can pull off great shows—the Olympics, Shanghai Expo, Asia Games—but it cannot solve the
problems of its people: the chaotic traffic in its megacities, pollution, quality of life and justice for its
workers and farmers. The only reason China is invests its foreign exchange reserves is for iquidity,
security and decent returns. It isn’t trying to save the world. China’s leaders lack a creative sense of
responsibility. They have cautious, incremental and narrowly focused interests. It’s high time China
starts adopting a broader concept of its interests and become a ‘responsible stakeholder’ in the global
system.
About Investeurs Consulting P. Limited
Investeurs Consulting Pvt. Ltd. is a business and financial advisory company, successfully serving businesses since 1994; we offer advisory and
consultancy services for successful fund syndication. We have serviced diverse businesses by arranging finance of over $1600 million. We are
strategic advisors to our clients during the ideation phase, implementation guides through start-up phase, and trusted advisors overall.
All businesses go through a similar life cycle. Once an idea is conceived and a business is established, a company requires capital to fund ongoing
growth and expansion. The Capital Structure has to be optimally structured during each phase of business cycle. Investeurs perceives the
requirement and accordingly arranges funds to help companies smoothly achieve milestones in the process.
Investeurs Competency Kit
Alignment of services with client’s business
Round the year Financial assistance
Facilitator between Banks and Clients
Hassel free & on time service
Industry & Market updates
DISCLAIMER
This document has been prepared and complied for the reference and information purposes only. The views expressed in this document are personal to the
researcher and do not reflect the view of any authority in any manner. The material is collected and referred from various print and electronic media, Investeurs
does not take any responsibility of the correctness of the same. Please consult your attorney, before acting on any information of this document.
INVESTEURS CONSULTING P.LIMITED, S-16, U.G.F, GREEN PARK EXT. , NEW DELHI, www.investeurs.com