Sudip Bandyopadhyay’s Blog

According to a recent Morgan Stanley report, China has simply grown too big to keep expanding at the 10 per cent rate it has sustained for 30 years, and is likely to slow to 8 percent at best next year and for the foreseeable future.Indian iron ore exporters recently warned that demand from steel mills in China had fallen sharply over the past month and that Chinese buyers were defaulting on contracts with suppliers.  With coal reportedly piling up in China’s eastern ports, the news of steel defaults will fuel concerns about the likely impact on global commodity prices of a slowing Chinese economy.  Analysts say smaller Chinese steel mills are losing money on their output because of weak steel demand and the hefty prices they paid for ore and coal ahead of the Bejing Olympics in August.  China’s crude steel output fell 5 percent month-on-month in August to 43m tones, although at least some of the fall was because of temporary industrial disruption caused by anti pollution and security measures imposed for the games.

China’s status as a pivotal source of demand for many commodities means even a mild slowing of its economy which has been growing at double-digit rates for years has serious implications for global prices. The decisive end of the era of double-digit growth in China will have major implications for the nation and the world.  Until now, China had defied the traditional theories of how fast developing nations could grow, and for how long.  Its economic growth has compounded at an annual average rate of 10 percent over the past 30 years, a record that has surpassed the other miracle economies, such as Japan and South Korea.  Japan’s growth rate downshifted significantly after 1973, when it reached a per capita income of $ 3,000 – a level China hit earlier this year.  Now the law of large numbers is catching up to China: in 1998, to grow its $1 trillion economy by 10 percent, it had to expand its economic activities by $ 100 billion and consume only 10 percent of the world’s industrial commodities.  Currently, to grow its $ 3.5. trillion economy that fast, it needs to expand by $ 350 billion a year and suck in nearly 30 percent of global commodity production. Even more important, there are clear signs in China’s response to the slowdown that the leadership understands that this moment was inevitable that it is abandoning it old growth-at-any-cost mentality, and will not try to artificially revive double-digit growth.

The  Indian Capital markets continued to witness significant volatility with a negative bias and closed the week in the red. The markets continued to be on tender hooks anxiously awaiting the much awaited Fed bailout package which  has been finally  finalized  friday evening, after an earlier failed attempt during the week. But most market observers believe that the Fed Bailout package is unlikely to fully rectify the credit crisis in US in totality and believe that even this bailout will take at least 6 to 9 months to be fully felt by the markets.  Even  after the $ 700 bn Paulson plan to buy toxic assets from the banks  has become a  law, the Treasury and the Federal Reserve still face the grim prospect of battling against systemic risks arising from crisis at individual financial institutions.  Regular auction style purchases by the new government fund will not be a substitute for emergency actions, even though the legislation strengthens the legal foundation for these rescue operations.  In effect, the US authorities now have two channels for dealing with troubled financial institutions.  Crisis at regulated banks will be dealt with via the Federal Deposit Insurance Corporation, while crisis at other financial institutions will be dealt with, where ever possible, through the Paulson plan framework. While the channels are different, the purpose is similar to contain systemic risk. In the case of commercial banks, the US authorities are particularly anxious to prevent any loss to depositors, including uninsured depositors above the $ 100,000 ceiling, for fear that any loss could cause a destabilizing run on the $2,500 bn of uninsured deposits in the US banking system.

After the US, Europe is beginning to feel the impact of this global phenomena which is bound to impact the economies of several countries overnight. While US needs a better rescue plan, the Europeans need probably a lot more, a system that can produce a rescue plan in the first place.  All these negative developments had a severe impact on global markets especially the US markets which saw relentless selling pressure amidst growing uncertainty on the macro conditions ahead and a tough scenario for the regulators and the governments. Meanwhile crude prices continued to soften and touched between $93-94 dollars a barrel with Inflation numbers for this week being moderately lower at 11.99%.   The Indian markets continue to look distinctly weak even this week. The markets are now at a critical support level.

The market sentiment continues to remain jittery and buying has completely dried up making market moves very sudden and volatile and thereby increasing the market risks considerably. The troubled US & European financial institutions were selling heavily last week & the trend may continue atleast for sometime this week .While there is no doubt that the global headwinds would continue to have a significant bearing on market sentiment in India, all positive news during the last week like the Nuclear deal finally being cleared, crude prices being softer and inflation also cooling off ,have failed to boost confidence levels within the markets. This  clearly signals the fact that unless globally markets show signs of stability , the Indian markets are expected to witness volatility and pain.

( ** this is the transcript of the weekly column I write for Economic Times )