"Time has been transformed, and
we have changed"
-Khalil Gibran (Lebanese,
1883-1931)
Word for the day
Enceinte (adj)
pregnant
(Source: Dictionary.com)
Malice towards
none
Governor Rajan says he
continues to remain "accommodative". Whereas industry finds him
unnecessarily hawkish.
Could you solve this
conundrum?
Mr. Market emerges victorius, once again
The apparent failure of the largest equity for debt swap in the
history holds important lesson for all of us.
The Chinese policy makers faced with mammoth debt of state of
enterprises (SoE) and poor health of their financial sector hastily encouraged
transfer of risk from SoEs to their unsuspecting population.
The process worked like this:
·
The state encouraged the household investors to
take out their deposits from banks, bring in their money lying in overseas
accounts, leverage their strong balance sheet and overseas assets to buy equity
in SoEs, which had unmanageable debt on their books.
·
The SoEs would redeem their debt to the domestic
lenders from the equity money collected from household investors.
·
Lenders would use the repayment received from
SoEs to fund the margin money to fuel an unprecedented stock market boom to
create wealth effect at massive scale.
This wealth effect was needed to propel domestic consumption
needed to support (i) the economic growth that was sinking as the export demand
slowed down and (ii) the overcapacities in infrastructure sector that had begun
to look ridiculous.
The objective therefore was to kill many birds with one stone,
e.g., - (a) convert the unmanageable debt of SoEs into equity, (b) restoring
the health of lenders through repayments received from SoEs; (c) create a
massive wealth effect to encourage domestic consumption to lower the reliance
on exports for growth; (d) make the humongous investments made in
infrastructure building in past one decade financially viable through higher
utilization rate.
The gamble has obviously failed.
Mr. Market has once again emerged victorious in a battle with the
state. It is proven once again that attempts to control free markets through
state command are least likely to succeed.
The refusal of Chinese stock market to play the ball has actually
increased the financial stress to ominous level - as a large part of the stress
which was concentrated only at few SoEs and lenders has got spread out widely
to households.
As we know from our experience from a similar episode, popularly
known as Harshad Mehta period (1989-1991), the destruction of household wealth
at this massive scale causes structural problems in the economy and the impact
lasts for many years.
Even after so many years of that episode, the household investment
in stock market has not reached even at half the level seen in early 1990s.
Despite one of the highest household savings rate in emerging markets, the
foreign money gets to play the controlling role in our stock market.
More on this later this week.
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