Goldman slashes target for China stocks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Goldman Sachs, which started the year upbeat on the outlook for Chinese stocks , significantly slashed its target for the country`s equities late Tuesday, citing deleveraging in the economy and the risk of hot money outflows in the coming months.

The US investment bank, which sees “no rainbow” ahead for mainland equities, cut its 2013 target for the China Security Index (CS1) 300 by 15 percent to 2,380 from 2,800. The new target represents 8 percent upside over the next six months.

The bank also downgraded its earnings outlook for components on the CSI 300 to earnings per share (EPS) growth of 6 percent from an initial estimate of 10 percent. The CSI 300, which is designed to mirror the performance of stocks traded on the Shanghai and Shenzhen stock exchanges, has a heavy weighting of financial stocks.

“Despite potential easing in funding costs after the quarter-end, we expect liquidity in the second half of 2013 to see a tightening bias, given the central government`s seeming intention to control financial risks by deleveraging, with a higher tolerance for slower growth,” strategists at the bank wrote in a report.

In mid-June, interbank lending rates soared to record highs, with the seven day repo rate rising to above 10 percent, compared to an average of 3-4 percent seen over the past year.

Chinese equities, among the worst performing globally this year, have been hit hard over the past month with concerns over a liquidity crunch and slowdown in the world`s second largest economy weighing on investors. The benchmark Shanghai Composite, for example, has plunged 14 percent since the beginning of June.

The risk of hot money exiting the market over the coming months is also increasing, the bank said, driven by a weakness in the domestic economy and rising US Treasury yields.

Goldman forecasts gross domestic product (GDP) growth will slow to 7.5 percent in the second quarter, 7.3 percent in the third quarter and 7 percent in the fourth quarter.

What will revive the market?

The bank says that structural reforms are critical in turning around the domestic equity market.

“Investors may be reluctant to price in reforms now, given its near-term cyclical costs, already weak growth, and time lag before reform dividends appear,” they said.

The Chinese government’s efforts to crackdown on lavish spending by officials and to rein in credit expansion in order to reduce inefficient investments, for example, are policies that should foster more sustainable growth over the longer run, but may inflict some short term pain.

“We think patience is needed to see meaningful valuation re-rating, even though we believe investors should eventually appreciate a more balanced economy even with somewhat lower growth,” they added, referring to China`s efforts to rebalance its economy to become more consumption led than investment driven.

-By CNBC`s Ansuya Harjani

Copyright 2011 cnbc.com

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Dollar-yen back above 100, but this time it’s different

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The US dollar/Japanese yen went past the 100 mark for the second time this year on Wednesday, but markets aren’t cheering, which is in sharp contrast to the euphoria in May when the pair first crossed this key level.
 
“The yen at 100 is significant psychologically, but we’re not going to get the hysterical cries for 120/130 yen to the dollar that we had before,” said Patrick Bennett, forex strategist at the Canadian Imperial Bank of Commerce (CIBC).

The yen hit 100.85 against the dollar in Asian trade on Wednesday, but analysts don’t expect a rapid weakening from here in the months ahead.

“We do expect the yen to go higher eventually, but it is likely to stay in the range of 95 to 105 to the dollar this year, and between 100 and 110 in 2014,” said Bennett.

The CIBC analyst added that Japanese investors’ reluctance to move their investments offshore was holding back the yen from weakening dramatically.

The yen has been one of the most talked about global currencies this year, amid its rapid depreciation against the dollar over the past nine months.

Japanese Prime Minister Shinzo Abe’s radical policies or “Abenomics” designed to overhaul Japan’s flagging economy and end deflation, have worked to weaken the currency by 25 percent since mid-November, in a boost for the world’s third largest economy’s struggling export sector.

The yen first hit the psychologically important 100 to the dollar on May 9, its weakest level since mid-2008, leading analysts then to forecast that the seemingly unstoppable free-fall would take the currency to levels of around 130. However, after hovering between 100 and 102 for much of May, the currency saw some renewed strength in June, moving back up to around 94 to the dollar and raising doubts over whether the yen would continue on its weakening trend.

Nizim Idris, head of strategy, fixed income and currencies at Macquarie bank, has a target of 110 for the dollar/yen by the year-end.

According to Idris, recent weakness in the yen has been driven by the perception that Abe will likely win the elections to the upper house of parliament on July 21, giving legitimacy to his policies.

“A win at the upper house elections will increase his legitimacy and wriggle room in terms of what he can push through. It will legitimize ‘Abenomics’ … we could get 105 to the dollar in the next few months on this,” he added.

Dollar Influence

Although domestic policy in Japan plays an important part in influencing the dollar/yen cross rate, the other half of the story is what’s happening with the US dollar. The greenback has strengthened considerably in recent months, amid talk that the US Federal Reserve’s tapering of its massive bond buying program could happen sooner than expected, helping yen weakness.

Some analysts say a pullback in dollar strength, could provide the next bump in the road for the yen.

“A lot of the dollar strength is driven by expectations of Fed tapering in September, a lot of that is in the price,” said Idris.

However, he added that a disappointment in US economic data could derail the weakening trend.

“US payrolls this Friday will be pivotal, it is possible that this data could weaken the dollar,” said Idris, referring to the upcoming June non-farm payrolls report. Economists have forecast an increase of 165,000 jobs.

Stan Shamu, market strategist at trading firm IG, added that US economic data would be a driver of the dollar/yen in the coming weeks.

“The next level of resistance is at 101 yen and with plenty of US event risk on the way we feel there is potential for further volatility. Japan would be hoping to see some strong readings from these releases to spur further dollar strength. This would then push dollar/yen higher,” said Shamu.
 
Another factor which could halt the yen weakening trend could be another bout of risk aversion, said Macquarie’s Idris, which would prompt investors to scramble out of riskier assets and into traditional safe havens like the yen.

“There are lots of issues driving this cross: the Japan domestic factor and what’s going on in the US and Europe. On its own, the yen is on a weakening trend but its link to the dollar is an issue, along with another bout of risk aversion. One possibility [risk aversion event] is Europe, with what’s happening in Greece, Portugal and the Middle East,” said Idris.

Risk aversion has spiked this week after Greece was given three days to reassure Europe and the International Monetary Fund that it could deliver on its bailout conditions, while the resignation of Portugal’s foreign minister Paulo Portas threatened a political crisis in the troubled euro zone economy.

Meanwhile social unrest in Egypt has heightened as protests against President Mohamed Morsi continue to unsettle global investment sentiment.

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Asia shoppers ‘the world’s biggest label lovers’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Three in five (61 percent) Asia-Pacific customers are willing to spend their hard-earned cash on designer products, higher than any other area in the world, according to an online survey by Nielsen.

Among a survey of 29,000 people across 58 countries, Nielsen found that Chinese consumers were the most likely to pay for designer goods . Some 74 percent said they would pay more for branded products – the highest of any country – followed by India and Vietnam, with 59 and 56 percent.

When asked whether they were drawn to high profile brands, 55 percent of Asia-Pacific consumers said they liked to buy products by famous brands, compared to a global average of just 47 percent.

“The economic boom in a number of Asian countries coupled with growing middle class populations has seen the emergence of a new breed of consumers with higher disposable incomes,” David Webb, managing director of advertising solutions at Nielsen said.

“Cashed up and ready to spend, these consumers are seeking out designer and well-known brands to project their new-found social status. The rapid expansion of the internet and other media channels has given rise to more exposure, awareness and desire for brands and products than ever before.”

Nielsen`s survey indicates that Asia Pacific customers are influenced in their brand-loving habits by advertising. Over 65 percent of the region`s consumers say advertising affects their brand preference. Globally, an average of 55 percent of people say advertising effects what they purchase in store.

Shoppers in Korea and the Philippines were most likely to be influenced by the power of advertising, with 79 and 78 percent respectively saying their brand favorites stemmed from adverts.

While the Nielsen survey follows the long-term trend of an expanding and aspirational middle class in Asia, it does not reflect how many of these consumers actually spend their money on luxury goods.

Last month, luxury experts Bain and Co. released a report predicting that luxury sales would be far lower in 2013 given decreasing growth in Asia, especially China.

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Here’s why Germans support the euro

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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If you want to see why Germans continue to support Chancellor Angela Merkel and the euro, you should visit this state in southwest Germany, the third-largest in the country and the heart of the nation’s industrial machine.

Think of it as the Orange County of Germany: wealthy, conservative and slightly suspicious of foreigners. This is the home of Daimler, Porsche and SAP, Europe’s largest software company.

Also read: EU confronts Washington over its spying on European allies

Few of Germany’s 16 other states have benefited more from the country’s export-led boom than Baden-Württemberg. Its unemployment rate of 5 percent to 6 percent is among the lowest anywhere in Europe.

I am visiting members of my extended family who moved from Romania between 25 and 50 years ago. Ethnically German, they were immediately granted citizenship and chose to live here because of the concentration of high-paying jobs. One works developing hardware for cable TV, another is in industrial machinery, a third just retired from the construction business, a fourth is in dentistry.

When I brought up the euro and Germany’s membership in the euro zone, all of them voiced a grudging support. There is a weariness of the seemingly endless requests for Germany to backstop the rest of the continent. It is not said in so many words, but the idea of “Germany first” is very much on everyone’s mind.

They want their politicians to solve the problems of Germany before those of the rest of Europe. One example: Recent flooding in southern Germany has been the worst in centuries, but there has been widespread criticism that assistance has been slow in coming to those who lost their homes.

“When there is a disaster somewhere else in Europe, the Germans are the first to help, but when there was disastrous flooding here, our own government was slow to help,” one of my cousins said over a dinner of Kartoffelsalat (potato salad), Kasefleisch (meat with cheese), Apfelkuchen (apple tart) and local rose wine, in a village near Pforzheim, about 50 miles south of Stuttgart and less than an hour’s drive from the French border.

But don’t think any grumbling about the euro means that Germans want out of the euro zone.

“Germany depends on exports now,” one of my cousins said. “We will not leave the euro, because it helps us too much.”

Most Germans do not know much about the inner workings of the European Central Bank, but everyone here knows two facts about the euro zone: Germany has a higher economic output per worker than its southern European neighbors, and the other European countries can’t devalue their currencies to be more competitive, as they did in the past.
 
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That’s why every one of the dozen or so Germans I have spoken with—from a wealthy real estate developer in Berlin, to a retired construction contractor in Villingen-Schwennigen, to members of my extended family living near Pforzheim, continue to support the euro.

To understand why, you have to look to the heart of the economy in this region of southern Germany: small and midsize manufacturing, known here as the Mittelstand (midsize company).

It’s a business that’s slowly disappearing in the United States: thousands of small companies (of 20 to 500 employees) in auto construction, electronics, optics, metallurgy, and clockmaking, to name just a few. What they all have in common is that particular German genius: precision engineering.

Here’s the key fact: About 40 percent of all this industrial output is exported.

That’s why Germans who shrug when I ask about the ECB back the euro: They believe it has helped make them even more competitive against their fellow Europeans.

Every German I have spoken with is very careful not to accuse Southern Europeans of being lazy, but it’s clear they all believe that the German willingness to work harder than everyone else is at the core of this country’s post-war success.

And that’s why most people here are conservative and continue to support Merkel, even though they may think she’s somewhat colorless and prone to flip-flop on many issues.

That support is starting to shift, however, because politics is changing.

Baden-Württemberg’s Landtag (state assembly) has been controlled by the center-right Christian Democrats since the state was created in 1951. But not anymore.

Here’s two ways you can tell the old party politics matter less: A Green Party-led coalition won control of the state assembly two years ago, and on the night I was visiting my relatives in a village near Pforzheim, the local meeting hall was packed with voters who wanted to hear the five candidates for Burgomeister (mayor), four of whom had no party affiliation.

My cousins talked enthusiastically about Green politics, which have finally entered mainstream thinking after gestating for 40 years.

They said the old party lines—the wealthy and upper middle class supporting center-right parties like the Christian Democrats, and the workers backing center-left parties like the Social Democrats—are starting to dissolve. Many perceive that both parties have run out of ideas.

But don’t kid yourself. There might be plenty of energy for “going Green,” but when I asked a cousin what was foremost on the minds of local citizens, he didn’t hesitate to answer—jobs.

It’s a pretty simple equation: Support for the euro is higher in high-employment regions like Baden-Württemberg than it is is high-unemployment regions like the former East Germany.

And it is on that statistic—job growth—that the future of the euro is likely to be settled. Even in Germany.

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S&P cuts ratings of Credit Suisse, Barclays, Deutsche Bank

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Standard & Poor’s announced Tuesday that it is cutting the credit ratings of three major European banks: Credit Suisse, Barclays and Deutsche Bank.

The downgrades, to A from A+, are because of higher risk, the company said in a statement, citing greater regulation and “uncertain market conditions.”

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The ratings agency also affirmed the A/A-1 long- and short-term ratings on UBS.

S&P’s outlooks on all these banks are stable.

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Is a Rudd revival bad news for Aussie stocks?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The freshly-instated Prime Minister of Australia, Kevin Rudd, may be winning over voters ahead of the keenly-contested Federal elections, but his increased popularity is raising the prospect of political uncertainty which could be bad news for stocks, analysts say.

An influential Australian poll on Monday revealed that Rudd, who ousted his predecessor Julia Gillard in a dramatic leadership vote last Wednesday, has revitalized support for the ruling Labor government.

The survey by Newspoll in The Australian newspaper showed Rudd`s return as prime minister had lifted the party`s vote by six percentage points from 43 percent to 49 percent over the past week. Meanwhile, support for the conservative opposition party, led by Tony Abbott, slumped to 51 percent from 57 percent.

Rudd`s individual popularity as prime minister also surged. He overtook Abbott as the preferred prime minister, the poll also showed, with 49 percent support compared to Abbott`s 35 percent.

But what`s turning out to be a comeback story for the ruling party could become a stumbling block for markets.

Market watchers tell CNBC that if Rudd gains further support, one potential outcome would be a hung parliament – a two party system of government which occurs when neither major political party achieves a majority – a scenario which will lead to further uncertainty for Australian businesses and a dampener for stocks.

“The `Rudd revival` has brought back the potential for a hung parliament which would be the worst case scenario for markets,” said Evan Lucas, market strategist at trading firm IG`s Melbourne office.

“For the Labor party to gain a majority, they would need both to retain the seats they already have, and pick up new ones, which doesn`t seem as likely, so a hung parliament would be more realistic. But the last thing the market needs is another three years of uncertainty, with a government which continually struggles to get its agenda pushed through,” added Lucas.

Stocks have given a mixed response to the recent political shake up. The Australian Stock Exchange rose 1.47 percent on the day Rudd was instated as prime minister. However, the index was down near 2 percent on Monday as investors struggled to interpret the fresh political uncertainty.

Up until recently, Gillard`s falling popularity had led most analysts to conclude that an opposition win was almost certain at the election, initially scheduled for September 14. However, the recent shake-up has introduced a new element of uncertainty for investors; even the date of the election is no longer certain, with Australia newspapers reporting that Rudd is looking to push back the vote to August.

According to Ray Attrill, senior FX strategist at BNP Paribas, the scenario most investors had priced in a few weeks back – for a win by the opposition – is now potentially off the table, which will inevitably make markets nervous.

“What it does mean is that there is an element of political uncertainty that didn`t exist a week ago, when it looked like Miss Gillard would remain in place and markets could continue to confidently travel without the uncertainty about what the election outcome would be,” said Attrill.

Matthew Circosta, economist at Moody`s Analytics, said the political “drama” that has underscored sentiment in recent months and is likely to continue up until the election is over.

“It is clearly weighing on business confidence, general sentiment and hurting the performance of equities as a result. We need to get past the hurdle of the elections before we can see businesses having the confidence to start investing and hiring again,” said Circosta.

Attrill added that political uncertainty would also prove a negative for the Australian dollar in the future as well.

The Aussie has taken a battering in recent times alongside heavy falls in the price of gold, slumping near 12 percent over the past six months to 0.91 to the dollar.

“Now we`ve got that uncertainty at the margin it is a factor that could add a little bit of weight to the Australian dollar, which is already in a down trend,” he added.

During Gillard`s tenure, which lasted three years and three days from June 24, 2010 to June 27, 2013, the benchmark SandP ASX 200 stock index rose about 7 percent.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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World’s 2nd biggest IPO of year lists this week

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The world`s second biggest initial public offering (IPO) of the year, a USD 4 billion new listing by Suntory Beverage and Food, makes its debut on the Tokyo stock exchange this week.

But it does so amid a backdrop of volatile equity markets, something that may not bode well for trading in the new shares.

“If you look at the hype you get with big IPOs and the big gains you often get in the first few days of trade, those days are now over,” said Kelly Teoh, markets strategist at IG Markets in Singapore.

“We`ve seen a lot of IPOs this year that have not done well and that`s because of the market volatility and because of the fears about an unwinding of the Fed`s [US Federal Reserve`s] monetary stimulus,” she added.

According to professional services firm Ernst and Young, Asia has seen about 111 IPO deals that have raised USD 16 billion in the first half of 2013, that`s down from 209 deals raising almost USD 24 billion in the same period last year.

Weak investor appetite amid volatile markets contributed to Suntory Holdings pricing its food and soft drinks unit at 3,100 yen (USD 31.68) per share, at the bottom end of a 3,000-3,800 yen per share range.

Still, the IPO is Asia`s biggest so far this year, followed by a USD 2.1 billion IPO by the infrastructure fund of Thai firm BTS Group Holdings in April. It is also the second largest IPO globally after a USD 5 billion listing of Brazilian financial services firm Seguridade Participacoes earlier this year.

Suntory Beverage and Food, well-known in Japan for drinks such as its BOSS canned coffee, will make its market debut in Tokyo on Wednesday. The parent company`s beer unit is not included in the IPO.

“We are in a period of correction, so it`s not a great time to list but I do think appetite towards Japanese shares will pick up,” said one Japan-based trader.

Japanese stocks, propelled higher since last November by expectations for aggressive monetary stimulus from the country`s central bank and optimism about growth prospects, have fallen back in the past month.

The benchmark Nikkei is down about 13 percent from a 5-1/2 year high set in May as concerns about an unwinding of US monetary stimulus and China`s economic growth dent major stock markets across the world.

Profit taking on the Nikkei`s double-digit gains this year and caution regarding the success of the country`s economic policies have also contributed to volatility in Japanese shares.

Hopeful

Analysts however were more hopeful about the outlook.

“The thing about this IPO is that it`s new paper being issued in an unfortunate market. It`s just bad timing,” said Ben Collett, the head of Asian equities at Sunrise Brokers in Hong Kong.

“We do think Suntory is a decent buy and it is a good time to get back into Japanese stocks versus other Asian markets, versus the US, versus Europe,” he added.

Even with its recent retreat, the Nikkei is up 33 percent so far this year, compared with a 14 percent rise in the SandP 500 index of US shares.

– By CNBC`s Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

Copyright 2011 cnbc.com

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Is Japan’s Nikkei getting its Mojo back?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Japanese stocks, which hit a new one-month high on Tuesday, appear to have got their mojo back, putting the 15,942 mark – a five-and-a-half year peak – within shooting distance.

The Nikkei`s seemingly unstoppable winning streak came to an abrupt end in late May and it lost some 20 percent in the weeks up to June 17. Even after that it has seen heightened volatility, but positive economic data since last Thursday have prompted a near 9 percent rally.

“Of course we are back on an upward trajectory,” said Nicholas Smith, Japan strategist at research house CLSA. “I think the five-and-a-half year high is definitely back in sight, there is still 20 to 30 percent room for growth in the market.”

Japanese equities soared over 80 percent since mid-November to late May, after Prime Minister Shinzo Abe first unveiled his radical economic plan to revive the country from 15 years of deflation.

The pullback raised some concern that the turnaround story has lost some of its luster, but analysts said the correction was nothing to do with a change in sentiment, but in part a result of fears over the tapering of the US Federal Reserve`s stimulus program.

 “The Japanese market was not over-valued, it was over-heated. The market was looking for an excuse for a pullback or a clean out and the `taper tantrum` worked to trigger that,” said Smith.

Recent positive data showed that Japanese manufacturers moved into positive territory for the first time in nearly two years last quarter, while industrial output and retail sales data for the month of May broadly painted a picture of an economy in recovery.

Makarim Salman, Japan equity strategist at global investment bank Jeffries, also sees Japanese stocks on an upward trend, but said investors need to be prepared for further volatility.

“We see the Nikkei as generally on a bullish trajectory, but the yen and the political environment will play a key factor in how fast it will rise higher,” he said.

The yen has lost 25 percent against the US dollar since mid-November, weakening past the psychologically important 100 level for much of May. But in recent weeks the yen has show some renewed strength, returning to levels of around 94 to the dollar in mid-June. On Tuesday it was back trading at around 99.5 to the dollar.

Besides following the yen, investors will now be looking ahead to the next risk event in Japan which will be the elections to the upper house of parliament on July 21. If Abe gains a majority in the elections, he should be in a stronger position to push through structural reforms.

“This is the one chance to get back, you won`t get a chance like this again,”CLSA`s Smith said, referring to buying into the Nikkei.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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China’s reforms need no ‘Wrist Cutting’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A sharp and sudden draining of funds from the interbank market a week-and-a-half ago, followed by equally fast liquidity injections, is an example of how China can support reforms to modernize the economy without harming its growth outlook.

In this particular case, measures were taken to restrain an informal network of money lenders while quickly restoring and protecting the financial intermediation by the regulated banking institutions.

This was a small-scale trial balloon of “creative destruction” – a process of innovation where a new system takes over from an old order – which China wants to implement in a vast program of reforms to build what President Xi Jinping calls “socialism with Chinese characteristics.” What that means in purely economic terms is not clear, but it looks like something along the lines of the European model of “social market economy.”

At any rate, that seems to be implied by China`s new leaders promising market economy and market-based reform mechanisms. Apart from that, little is known about the specific features of these reforms. A high level commission, presided by Mr Xi, is currently working on a detailed reform program to be presented next October to the third plenum of the 18th Central Committee of the Communist Party of China. Traditionally, third plenums are the launching pads for major policy changes.

Gradual and Orderly Reform Process

But one thing is clear. Reforms intended to create a more efficient economic system need not lead to slowing demand and output, as foreshadowed in repeated government statements.

No, the reform process China`s Prime Minister Li Keqiang calls a “self-imposed revolution” does not have to “feel like cutting one`s own wrist,” a flagellant metaphor he used during his inaugural press conference last March.

On the contrary, China has the means to change the current structure of its economy in an orderly and gradual manner, and to make these changes politically and socially acceptable by maintaining its potential and noninflationary growth of about 8 percent. In fact, Mr Li (we should call him Dr Li because he is China`s first prime minister with a doctorate in economics) said that such a growth rate was “within the reasonable expectations of our macroeconomic controls,” during his recent visit to Germany.

China is not a newcomer to structural changes and a creative-destructive process that follows in their wake. Just think of all the changes that were managed successfully from the time of an impoverished China Deng Xiaoping inherited in late 1970s, after the devastating Cultural Revolution, to the world`s second-largest economy it is today.

Many of the reform processes that took place over that period of 35 years have been experiments with free and open markets and special economic zones – a reformist equivalent of the “Great Leap Forward” under the stewardship of the former Prime Minister Zhu Rongji during Jiang Zemin`s presidency in the 1990s. That was the time when many inefficient state-owned companies were closed down, or merged in new entities, with millions of people losing their jobs in precarious conditions of a quasi inexistent social safety net.

Regulatory Changes and Huge Development Projects

Today`s China is vastly different. It is a country whose foreign currency reserves are nearly half of its gross domestic product (GDP); its budget deficit is about 1 percent of GDP, the public debt is only 22 percent of GDP and the inflation rate of 2.1 percent is an example of price stability. This is a country with plenty of room for monetary and fiscal policies to support economic growth on the way to the “social market economy” – if that is what Beijing wants.

Apart from regulatory changes to modernize the fiscal and financial systems, and to increase the labor market flexibility, the main factors that will drive the process of China`s structural transformation are (a) urbanization, (b) development of service sector industries and (c) the growth of household consumption.

There is enough there to sustain a high level of economic activity to mitigate short-run problems of frictional unemployment and temporary demand-supply mismatches in the existing labor force.

Consider, for example, the huge, epochal project of urbanization Mr Li called “one of the top priorities” when he came to power last March. Some 400 million rural dwellers are expected to be moved into cities over the next decade at an estimated cost of more than $6 trillion – a sharp acceleration of a trend already under way since the early 1980s, when 80 percent of China`s people were living in the countryside. That is now down to about 50 percent. And the goal is to fully integrate 70 percent of the population into urban areas by 2025.

Think of the infrastructure, new transportation networks, production of consumer durable goods and health and education services such an enormous project will entail.

Urbanization will also be the key vector for structural changes of Chinese economic growth. It will spur the development of service sector industries and will shift resources away from exports to household consumption.

These trends are already under way. In the first quarter of this year, China`s economy showed for the first time that services overtook manufacturing, accounting for 48 percent of GDP compared with 46 percent for the goods producing sector.

Being highly labor-intensive, service industries created 12 million new jobs in 2012, despite the fact that last year China`s economic growth of 7.8 percent was the slowest since the late 1990s. Clearly, expanding services are providing employment opportunities to people who are made redundant in shrinking manufacturing and farming sectors.

Urbanization and rapidly developing services will also increase the share of household consumption in aggregate demand – an important policy objective as China seeks to reduce its reliance on exports and excessive investments. A notable progress has already been achieved in that area: consumer spending has been a bigger growth driver than investments since 2011.

All this shows that no “wrist cutting” is needed to create a more efficient, market-driven Chinese economy in an environment of sustained 7-8 percent growth that will preserve price stability and avoid destabilizing sectoral imbalances.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Goldman turns bearish on BRIC economies

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Goldman Sachs says it has ended a recommendation to buy a basket of US stocks with the highest sales exposure to Brazil, Russia, India and China (BRIC) and instead prefers US firms with most exposure to the domestic market – just one more sign that sentiment towards emerging markets is fading fast.

The US investment bank said its decision was based on revised expectations for slower growth in China, the world`s second largest economy. Goldman last week cut its 2013 China growth forecast to 7.4 percent from 7.8 percent.

“The contrast between accelerating US GDP (gross domestic product) growth and weakening and uncertain China growth represents a headwind to US firms with high BRICs([Brazil, Russia, India, China) sales relative to domestic-facing firms,” Goldman Sachs said in a note published on Monday.

It estimates that the median company in its basket of US stocks with the highest BRIC exposure will grow sales by 3 percent this year, compared with 6 percent for a basket of US stocks with most exposure to domestic sales.

Sentiment towards emerging markets has been hit hard in recent weeks by concerns about an unwinding in US monetary stimulus and signs that China`s economy is slowing faster than anticipated.

Goldman is just one of several banks to slash their China GDP forecasts over the past month or so, with data on Monday adding to the bearish sentiment towards the Chinese economy.

China`s official purchasing managers` index (PMI) slipped to 50.1 in June from 50.8 in May, while the HSBC PMI fell to a nine-month low of 48.2, remaining below the 50-mark that divides expansion from contraction.

In contrast, data released on Monday showed US manufacturing activity grew in June, rebounding from an unexpected contraction in May.

But China is not the only country in the BRIC grouping to have received gloomy news of late. A fall in the Indian rupee to record lows against the US dollar last month has raised concerned about India`s ability to finance its current-account deficit , while there is unrest in Brazil , which has struggled with mass protests on a number of issues such as corruption, fares on public transport and high crime levels.

Goldman said that its basket of US stocks with the highest BRICs sales exposure has returned 15.6 percent since it recommended the trade in late November last year. That is close to the 15.4 percent returns on the SandP 500 (INDEX: .SPX) but below the 17.5 percent returns on its basket of U.S. equities with a greater exposure to US sales.

“We originally expected (US stocks with BRICs sales exposure) to outperform on increased confidence in the strength of EM [emerging market] economic growth relative to stocks with higher exposure to the US economy, where we expected a mid-year growth `hump` as a result of fiscal policy headwinds,” Goldman said in the note.

– By CNBC`s Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow