12 THE GREAT CHINESE SLOWDOWN

MUMBAI | 9 JANUARY 2016

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AFTER LAST AUGUSTS STOCK MARKET PLUNGE AND CLUMSY WIDENING OF THE CURRENCYS TRADING BAND,
CHINAS CONTROLS ON ITS STOCK MARKET BACKFIRED THIS WEEK, RATTLING INVESTORS AROUND THE WORLD

Indian markets' worst

week in four years

MARKETS IN A FREE FALL

World indices in the first fullweekof 2016

Benchmark indices plunge 4.7% in the first full week of 2016

BS REPORTER

Mumbai, 8 January

ndian markets saw their worst weekly

pounding in more than four years due to
turmoil in the Chinese market.
ThebenchmarkSensexandNiftydropped
4.7 per cent in the first full week of 2016, their
worst weekly performance since November
2011. On Friday, however, the Indian market,
similar to global counterparts, saw some calm
aftertheChinamarketreboundedtwopercent
buoyed by buying of shares by government
authorities and suspension of circuit filters.
The benchmark Sensex on Friday gained
0.33 per cent, or 82.5 points, to end at
24,934.33, the 50-share Nifty gained 33
points, or 0.44 per cent, to close at 7,601.35.
Fortheweek,however,thebluechipindices
fell as much as five per cent as a global flight of
capital saw foreign investors pull out nearly
~2,000 crore. India and other world markets
were rattled due to a halt in trading twice during the week in China after its benchmark
indices hit circuit breakers of seven per cent.
Clearly, many investors are worried right

now. As we see it, there is no question that

China should continue to have strong
growth this year, but one might say China is
facing a bit of a conundrum. On one hand,
the government wants stability, but on the
other, it also is striving toward more openness. That means we could see more volatility in Chinas market this year as these conflicting forces play out, Mark Mobius
executive chairman at Franklin Templeton
Investments, and an expert on emerging
markets, wrote in a blog on Friday.
Concern over the health of the Chinese
economy, which remains the global engine
of growth, unnerved investors and wiped
out nearly $4 trillion from global equity markets. The events of the week had resemblance to August 2015, when a surprise
devaluation in the renminbi by Chinas central bank had sent shock across global financial markets. The Indian market had come
off as much as 10 per cent following the
China move in 2015.
While the deflationary trend has long
been evident in the developed world, given
the subpar post-2008 recovery, the intensi-

fying market concerns about China over

the past six months reflect investors focusing on the reality that the one area of decent
growth since 2009 is also now slowing,
said Christopher Wood, managing director
and equity strategist at CLSA, in the Greed
& Fear newsletter. Wood highlighted China
and the other emerging markets have
accounted for 75 per cent of the increase in
world nominal GDP in US dollar terms
between 2009 and 2014.
Domestic brokers said the Indian markets would continue to remain vulnerable to
the volatility in China in the coming weeks.
Beside global cues, traders will also keep an
eye on the December quarter result
announcements from next week.
On Friday, the major gainers on Sensex
included Tata Motors, which rose three per
cent, Tata Steel, which gained 1.44 per cent,
and Reliance Industries, which added 1.2
per cent. Cipla, which fell 2.6 per cent, and
Larsen & Toubro (L&T), which lost 2.2 per
cent, were among the major losers. CLSA
replaced Reliance with L&T in its Asia exJapan long-only portfolio.

THE AMERICAS (As of Jan 7)

NASDAQ COMPOSITE INDEX
BRAZIL IBOVESPA INDEX
MEXICO IPC INDEX
DOW JONES INDUS. AVG
S&P 500 INDEX
S&P/TSX COMPOSITE INDEX
Europe (As on IST 1630 hrs)
DAX INDEX
FTSE MIB INDEX
Euro Stoxx 50 Pr
AEX-Index
FTSE/JSE AFRICA TOP40 IX
CAC 40 INDEX
OMX STOCKHOLM 30 INDEX
IBEX 35 INDEX
SWISS MARKET INDEX
FTSE 100 INDEX
Asia (Till markets close)
SHANGHAI SE COMPOSITE
NIKKEI 225
HANG SENG INDEX
PSEi - PHILIPPINE SE IDX
TAIWAN TAIEX INDEX
S&P BSE SENSEX INDEX
Straits Times Index STI
Nifty 50
*Change over previous week
Source Bloomberg

Jan 8, 2016 % change*

4,689.43
40,694.72
40,661.57
16,514.10
1,943.09
12,448.21

-6.35
-6.13
-5.39
-5.23
-4.93
-4.32

10,009.08
20,197.44
3,082.80
418.16
43,410.84
4,396.66
1,372.14
9,061.20
8,437.34
5,980.81

-6.83
-5.70
-5.65
-5.36
-5.21
-5.18
-5.16
-5.06
-4.32
-4.19

3,186.41
17,697.96
20,453.71
6,575.43
7,893.97
24,934.33
2,751.23
7,601.35

-9.97
-7.02
-6.67
-5.42
-5.33
-4.69
-4.56
-4.54

Compiled by BS Research Bureau

UP AGAINST THE GREAT WALL

Gold slides from

9-week high

In the pastyear, the going got tough for a countrythat had become theworlds growth
engine in the past decade

AGENCIES

Gold prices fell for the

first time this year on
Friday, after Chinas
measures calmed markets. It was down one per
cent at $1,097.30 an
ounce at 1053 GMT,
while US gold futures for February
delivery were down $9.90 an ounce at
$1,097.90.
Concerns over China, and possibly the Middle East, have prompted
some safe-haven demand. That has
stirred the gold price, Capital
Economics
analyst
Simona
Gambarini said.
The precious metal has enjoyed its
best week since August, rising almost
4 per cent as global equities and commodities sold off. Gold was the best
performer in the Bloomberg
Commodity Index, which tracks 22
materials. Gold sank 10 per cent in
2015, its third straight annual drop and
worst streak since 2000.

Oil rebounds from

12-year low
AGENCIES

Crudeoilreboundedfrom
a 12-year low as investors
focused on the volatility
in Chinese markets, after
the country sought to
quell losses in equities
and stabilise its currency.
Brent rose 9 cents to $33.84 a barrel
by 1114 GMT, near a low of $34.18
reached in July 2004. US West Texas
Intermediate (WTI) was flat at $33.27 a
barrel.
Over the past year, the world has
been producing 1.5 million barrels per
day more oil than it consumes. OPEC
and the International Energy Agency
expect global demand growth to slow
in 2016 to 1.20-1.25 million barrels per
day from a very high 1.8 million bpd
in 2015.
Average US oil rigs fell by 46 in
December to 714 compared with
November, Baker Hughes INC said on
Friday. The worldwide rig count for
December fell by 78 to 1,969.

Source: Bloomberg
Compiled by BS
Research Bureau

WITH THE GLOBAL ECONOMY SO

CRITICALLY INTEGRATED, VOLATILITY IS
THE NEW NORM. IN THE LAST FEW DAYS,
WE HAVE SEEN PRICES OF OIL COLLAPSE.
WE HAVE SEEN THE CURRENCY CRISIS
CURRENTLY ON IN CHINA. AND
OBVIOUSLY THE GLOBAL SLOWDOWN
ARUN JAITLEY
Indias Finance Minister

MY DEFICIT WITH CHINA WILL

WIDEN WE HAVE DONE GROUND
WORK BUT ARE NOT RUSHING INTO
IMPOSING A MINIMUM IMPORT PRICE
FOR STEEL
NIRMALA SITHARAMAN
Indias Trade Minister
Indias trade deficit with China stood at about
$27 billion between April and September last year,
compared with nearly $49 billion in the
fiscal year ending in March 2015

CHINA HAS LAUNCHED

DEEP STRUCTURAL REFORMS TO LIFT
INCOMES AND LIVING STANDARDS,
SEEKING A NEW NORMAL OF SLOWER,
SAFER, AND SUSTAINABLE GROWTH
THAT RELIES MORE ON SERVICES AND
CONSUMPTION AND LESS ON
COMMODITY-INTENSIVE INVESTMENT
AND MANUFACTURING. BUT CHINAS
POLICYMAKERS ARE CONFRONTING A
DELICATE BALANCING ACT: THEY NEED
TO IMPLEMENT THESE DIFFICULT
REFORMS WHILE PRESERVING DEMAND
AND FINANCIAL STABILITY
CHRISTINE LAGARDE
Managing Director, International
Monetary Fund

CHINAS AUTHORITIES HAVE

CLEARLY BITTEN FAR MORE
THAN THEY CAN CHEW IN THEIR
MARKETS AND ECONOMY
REFORM EFFORTS, WITH A
CLEAR SENSE THAT THEY ARE AT
BEST FUMBLING IN THE DARK
EMERGING
MARC OSTWALD,
Strategist, ADM Investor
Services

CONSIDERING CHINAS
FOREIGN DEBT, TRADE AND

EXCHANGE RATE
MANAGEMENT, IT NEEDS
AROUND $3 TRILLION IN
FOREIGN EXCHANGE RESERVES
TO BE COMFORTABLE
HAO HONG,
Chief China Strategist, Bocom
International Holdings

THE INTENSIFYING MARKET

CONCERNS ABOUT CHINA OVER
THE PAST SIX MONTHS REFLECT
INVESTORS FOCUSING ON THE
REALITY THAT THE ONE AREA OF
DECENT GROWTH SINCE 2009 IS
ALSO NOW SLOWING
CHRISTOPHER WOOD
Managing Director and equity
Strategist, CLSA

Markets no longer give Beijing the benefit of doubt.

Hence, basic laws of economics are being reasserted

Going down
with the
renminbi
JOYCE POON

Emerging markets have faced significant

headwinds ever since the taper tantrum of mid2013 when investors began to factor in tightening
moves by the US Federal Reserve. Their headache
got much worse last summer, when China allowed a
mini-devaluation of the renminbi, and 2016 is
hardly starting well. The root problem is that most
emerging markets are over-geared and need to ease
policy if growth is to be kick-started. Unfortunately,
easing is largely out of the question when jittery
global investors are fretting about a China-induced
currency war.
Since 2008, emerging markets have been driven
by four key factors; namely, the oil price, Chinas
currency policy and the level of both the yen and
euro against the US dollar. The key risk now is a big
depreciation of the renminbi, which, unlike my
colleagues in Beijing, I consider to be quite likely
they put the chaos of recent days down to bad
communication while I think the market is rational
to force accelerated depreciation of the renminbi. If
the Fed matches market expectations with rate
hikes then Chinas currency can very easily end the
year at 7 to the dollar.
My contention is not that Beijing is a currency
warrior. Until last August, China was just able to
balance the contradictory objectives of cutting
interest rates, keeping a stable renminbi and
liberalising its capital account. The Peoples Bank of
China managed this breach of the impossible
trinity through carefully calibrated interventions.
That ability to cheat fundamentals, however, was
lost in the aftermath of last summers botched shift
to a more flexible currency
regime (my point is that it
The root problem
was only a matter of time).
is that most
As a result, the market no
emerging markets
longer gives Beijing the
are over-geared
benefit of the doubt and
and need to ease
policy if growth is hence, the basic laws of
to be kick-started economics are being
reasserted. The central bank
can delay the inevitable by selling foreign exchange
reserves, but confidence in the unit is waning as
shown by its currency pile declining by a record
$107.9bn in December versus an expected $23.3bn.
This leaves policymakers with some hard choices.
My colleagues in Beijing expect Chinese short rates
to decline by 100bp this year and the renminbi to
only depreciate mildly against the dollar . The only
way I see that happening is through a reversal of
capital account liberalisation measures (i.e.
acceding to the trinity dictum that two sides of the
triangle can be controlled, but not all three).
A decisive bottoming in Chinese growth may
reverse this dynamic, but this seems unlikely given
that global demand is slowing and Chinas private
sector is struggling . A backtracking on US rate rises
would lower pressure on the renminbi, but such an
eventuality would point to more serious problems.
Against this backdrop, few US dollar-based
investors will give Emerging Asia a second thought,
regardless of whether Indias economy improves or
Indonesia embraces more accommodative and
business-friendly policies . This is because a
weakening yuan will apply constant downward
pressure to Asian currencies which are costly to
hedge. In such a strong dollar environment, foreign
debt servicing costs will rise, and any stabilisation of
growth will be hard to achieve. Adding insult to
injury, it is not even clear that emerging markets
(including Asia) offer especially attractive
valuations. The overnight suspension of Chinas
equity market circuit-breaker system may ease the
immediate panic. But, unfortunately, the negative
dynamic between China and its neighbouring
markets is not about to quickly reverse.
This is reprinted with permission from Gavekal Research

THE COMPASS

China impact on Tata Motors already accounted for

90 per cent of the 50 analysts covering the stock offer 34 per cent upside
RAM PRASAD SAHU
After losing 14 per cent since
the start of 2016 on worries
related to China demand and
yuan devaluation, Tata
Motors recovered a bit, gaining three per cent to close at
~353 on Friday. Brokerages say
the concerns related to China
are overblown on both pricing, as the company starts to
localize its production, and
currency.
While China accounts for
less than a quarter of volumes
andrevenues,giventhehigher
margins of the products sold,
its share of Jaguar Land Rover
operating profits are expected
to be upwards of 40 per cent in
current fiscal, according to
Kotak Securities. Analysts at
the brokerage house say every

VolumesinChina
five per cent
Base=100
125
were down 24 per
depreciation in
S&P BSE
centyear-on-year
the yuan will
Sensex
100
in 2015 and have
impact
JLRs
been the biggest
Ebitda by only 3
overhang on the
per cent. Of the
75
Tata
Motors
nearly 100,000
Tata Motors 50
stock, as the UKvehicles JLR is
Jan 1,15 Jan 8,16
based subsidiary
expectedtosellin
Compiled by BS Research Bureau
accountsfornearChina in the curly all the net profrent fiscal, only
two thirds are expected to be its at a consolidated level. The
importedfromtheUK.Inaddi- companyhasattributedthefall
tion to increased localisation, inChinasalestoweakdemand,
what could limit the currency model restructuring and on
impact is platform consolida- industrial explosion at Tianjin
tion and economies of scale. port. However, on a sequential
Thevolumecontributionfrom basis,ChinasalesinDecember
the manufacturing joint ven- were up 25 per cent over
ture in China is expected to November,crossingthe10,000
increase from four per cent in mark after 10 months.
What has helped in keepFY15 to over 50 per cent in
FY18, helping the company ing the volume momentum
improve competitiveness. high is the uptick in US and

UK sales. For example,

December sales in the US were
up 30 per cent year-on-year,
while sales for 2015 were up
26 per cent.
The other driver for the
stock could be higher truck
and passenger vehicle sales in
India, on the back of new
launches. Medium and commercial vehicle sales in the
current fiscal were up 22 per
cent, while passenger vehicle
sales were up by five per cent.
Indian business accounts for
less than 20 per cent of the target price arrived at by Tata
Motors, using a sum-of-parts
valuation. Nearly 90 per cent
of the 50 analysts covering the
stock have a buy rating on it
with a target price of ~473,
offering a 34 per cent upside
from current levels.

A risky bet

are now bearing the brunt of

its economic slowdown.
Meanwhile, companies
operating in so-called new
economy industries such as
technology, clean energy and
times earnings.
The Shenzhen bourse, media have gravitated to
which is dominated by private Shenzhen. Retail investors
sector firms, looks even pricier. love them, largely ignoring
The average company listed earnings performance as they
search for compathere is valued at
around 36 times Chinas benchmark nies they hope will
dominate Chinas
historical earnings, index was down
faster-growing
in line with the around 12% in the
consumer-driven
long-term average first four trading
sectors.
These
of 34. Small-cap days of 2016,
stocks look most
companies listed giving up all of
vulnerable to any
on
Shenzhens last years gains
renewed sell-off.
ChiNext board are
at a dizzying 67 times. To some Thats bad news for private
extent, those valuations reflect sector companies trying to
the underlying growth story. raise capital. And since the priShanghai is dominated by vate sector generates most of
stodgy state-owned compa- the jobs in the Peoples
nies which powered Chinas Republic, that in turn could be
investment-driven growth bad news for Chinas future
over the last three decades and economic growth.

China's new economy most vulnerable to stock slide

investors have had a
Chinas new econostomach-churning
my looks most vulweek. Chinas benchnerable to its stock
mark CSI300 index
market
sell-off.
was down around 12
Though the new-year
per cent in the first
slide in equity prices
four trading days of
has dragged down val- RACHEL
2016, giving up all the
uations, private sector MORARJEE
gains it made last year.
companies still look
Some may view the
relatively expensive.
slideasabuyingopporThat could spell more
pain for the stocks most tunity. Companies listed in
beloved by the mom-and-pop Shanghai now trade at 13 times
investors who dominate historical earnings, according
to Thomson Reuters Data - well
Chinese bourses.
Share prices recovered below the average multiple of
some lost ground on the morn- 20 over the past 10 years. But, by
ing of January 8, after regula- international standards, they
tors suspended a circuit- still appear expensive. Hong
breaker mechanism which Kongs Hang Seng Index, which
halted trade twice since the includes many big Chinese
start of the year. Even so, groups, trades at around eight

The authors is a Reuters Breakingviews columnists. The opinions expressed are her own. For further commentary see www.breakingviews.com