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apputtu no 1

How Chinese Savings Is Helping Stock Markets...

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Hi guys,

I always thought there is another bubble going on in emerging markets' stock markets.

Feel free to comment on this. Look at the following article from a leading economist from India in the economic times newspaper. He thinks the current stock boom is created by chinese savings and this will endure the business cycles. What he doesnt talk about is the Fed's plans to increase interest rates.

from economictimes.indiatimes.com

Read how Chinese savings make the sensex boom



NRI Special Offer!

As the Bombay sensex bobs up and down, I am amused by explanations

emanating from stockbrokers. Some attribute fluctuations to the latest

quarterly results, others to the ups and down of oil prices, still

others to Indian economic and political events. Such analysis is mostly


Indian markets today are part and parcel of global markets, and move in

line with global trends. Local events matter, but are subsidiary to

global ones. Whenever local stock market trends fall below global ones,

it is probably a good time to buy.

This was certainly the case when the stock market crashed after the NDA

was beaten in the last election. Foreign investors were spooked by the

possibility that the Left would dictate to the Congress, and so freeze

economic reforms.

That did indeed happen. Yet, after a pause, the sensex boomed again, to

heights unimaginable a year ago. A major local event was drowned out by

a global trend, the rush of money into all emerging markets.

The biggest global trend today is what the new head of the US Federal

Reserve Board, Ben Bernanke, calls a glut of global savings. He says

record US current account deficits, representing an excess of spending,

are mirror-images of excess savings in China and elsewhere.

Across Asia, savings exceed investment, and so countries that used to

run current account deficits now have surpluses. This global glut of

savings, especially the Chinese glut, is driving up global asset prices.

To that extent, the sensex boom is driven by the Chinese savings boom.

That is good news, since savings rates are more stable than fickle

investment fashions. This implies that the sensex will fall less in a

cyclical downturn.

In the early 1990s, fast-growing Asian countries used to run large

current account deficits, representing shortfalls of savings relative to

investment. The shortfalls were financed by capital flows from rich


But after recovering from the Asian financial crisis, virtually all

Asian countries have been running large current account surpluses.

This is partly because of greater caution in policy, partly because

investment has moved from East Asia and South-East Asia to China. Higher

remittances from overseas nationals have also raised savings, notably in


China’s savings rate is now 50% of GDP, the highest in recorded history.

This exceeds even its high investment rate of 45%. Foreign direct and

portfolio investment further raises the savings surplus, which has no

outlet within China, and so ends up in the country’s forex reserves.

China’s forex reserves now total $769 billion, more than India’s entire


The global savings glut has been exacerbated by high oil prices. This

has diminished the current account surpluses of some Asian countries,

though not China’s. But the surpluses of oil exporting countries have

gone through the roof.In the 1970s, oil exporters went on a spending

spree, ending in a mess when oil prices fell.

They are determined not to make that mistake again, and so are saving

their surpluses in funds abroad to ensure incomes for future

generations. Russia, now a big energy exporter, had a trade surplus of

$113.4 billion in the 12 months ending August, more than even China’s

$93.1 billion.

So, the savings surpluses of Asia are being exacerbated by those of oil

exporters. Other commodity exporters are joining the party. Booming

commodity sales gave Brazil a current account surplus of $12.5 billion

in the latest quarter. For the same reason even Argentina, historically

a low saver, now runs a small current account surplus.The global savings

glut desperately seeks investment outlets across the globe.

It has driven down interest rates across the globe, to extraordinarily

low levels by historical standards. In real terms, the 10-year US bond

has a zero or negative real return: US inflation is running at an

annualised rate of around 5%, higher than the 10-year treasury yield of


Given such low real interest rates, the global glut of savings is

naturally looking for assets with a better yield. Stocks in mature

economies like the US already have high price-earning ratios, limiting

prospects for appreciation.

So the global glut has gone into the housing market, into junk bonds,

and the stocks in emerging markets. That explains the boom not just in

India but across emerging markets. The sensex is up 20.8% this year, but

that is nothing compared with the rise of 94.2% in Egypt, 62.7% in

Colombia or 52.4% in Russia.

Is this a cyclical boom that will soon end a bust? In preceding decades

too, sporadic bursts of global optimism sent billions into emerging

markets, and every time the boom proved temporary.

When excess optimism gave way to apprehensions of risk, billions flowed

back from emerging markets into safe havens like the US. In 1995, an

increase of no more than two percentage points in the US interest rate

was enough to drive billions of FII investment back to the US, causing a

crash in emerging markets.

A major difference this time, I believe, is the global savings glut.

This looks structural, not an investment fad. So it will tend to

continue even in a cyclical downswing.Analysts fear that US consumer

spending could suddenly fall, ending the current global economic boom.

That is certainly a risk. But its immediate impact will be to raise US

savings, and hence the savings glut.

With a lag, increased US savings could cool the global economy and so

reduce savings in other countries. But this process will take time, and

the decline in savings elsewhere may not fully offset the increase in US


I do not believe that the business cycle has disappeared, or that

markets will move only upwards. But I do sense a structural change. I

believe that emerging markets like India will no longer be investment

avenues of last resort.

They will continue to be in global portfolios even in difficult times.

If so, the sensex boom will be more durable than in earlier cycles.

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