Asian Stocks Decline for Second Week on Europe, Growth Concerns

By Kana Nishizawa and Adam Haigh - Sep 28, 2012

Asian stocks fell a second week amid concern political discord will prevent Europe from resolving its debt crisis as global growth slows. Losses were limited on speculation China will take new steps to boost the world’s second-largest economy.
Esprit Holdings Ltd. (330), a clothier that counts Europe as its largest market, sank 6.6 percent in Hong Kong after missing earnings estimates. Woongjin Coway Co. (021240) slumped 24 percent in Seoul after the water-purifier maker’s parent filed for bankruptcy protection. United Spirits Ltd. (UNSP) surged about 24 percent in Mumbai after London-based Diageo Plc confirmed it’s in talks to buy the maker of whiskies and brandies.
The MSCI Asia Pacific Index (MXAP) slid 0.8 percent to 122.47 this week, its second-straight weekly loss. The gauge gained 4 percent for the month as central banks from Europe, the U.S., Japan and China took action to support economic growth.
“A period of consolidation in the month ahead looks the more likely outcome,” said George Boubouras, Melbourne-based head of investment strategy at UBS AG’s Australian wealth management unit. The bank oversees about $1.5 trillion. “In Europe, there will continue to be some lingering challenges.”
Stocks on Asia’s benchmark index were valued at about 12.8 times estimated earnings on average, compared with about 13.9 times for the Standard & Poor’s 500 Index and 11.9 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Japan’s Nikkei 225 Stock Average (NKY) sank 2.6 percent this week as industrial production fell more than economists forecast in August and a territorial dispute between Japan and China intensified. Automakers declined as violent protests against Japanese businesses in China forced production cuts.

Manufacturing Slump

The Bank of Japan’s Tankan report due Oct. 1 is expected to show the nation’s biggest manufacturers grew more pessimistic this quarter as China’s slowdown and Europe’s crisis sapped exports.
China’s Shanghai Composite Index (SHCOMP) added 2.9 percent to 2,086.169 amid expectation the government would offer measures to boost the equities market after the gauge dipped below 2,000. All the index’s gains this week came on Sept. 27 after a Shanghai Securities News report the regulator might introduce measures to buoy stocks.
Hong Kong’s Hang Seng Index (HSI) climbed 0.5 percent, while Taiwan’s Taiex Index decreased 0.5 percent. Australia’s S&P/ASX 200 Index fell 0.5 percent. South Korea’s Kospi Index slid 0.3 percent as the nation’s industrial production fell more than expected in August.

Deadlocked Leaders

Shares slid after German Chancellor Angela Merkel and French President Francois Hollande last weekend clashed on a timetable to introduce joint oversight of the region’s banking sector. Merkel rebuffed Hollande’s appeal to activate it “the earlier, the better,” underlining disagreement between the euro zone’s biggest economies.
Nippon Sheet Glass Co. (5202), which counts Europe as its No. 1 market, declined 6.8 percent to 55 yen in Tokyo. Esprit dropped 6.6 percent to HK$11.92 in Hong Kong after posting full-year profit that missed analyst estimates. Sales in Germany, Esprit’s biggest market, fell 9 percent.
Stocks rebounded yesterday after Spanish Prime Minister Mariano Rajoy’s nine-month-old government announced a fifth austerity budget that may help it meet deficit targets.

Island Fight

Japanese stocks fell the most this week among Asia’s benchmark indexes as a dispute with China escalated over the ownership of uninhabited islands in the East China Sea.
Nissan Motor Co., the top Japanese seller of vehicles in China, slid 5.1 percent this week. The carmaker suspended production in China after anti-Japan protests escalated, with rioters torching showrooms and smashing cars. Toyota Motor Corp. (7203), Asia’s No. 1 automaker, fell 5 percent. Honda Motor Co. declined 7.8 percent.
Woongjin Coway tumbled 24 percent to 30,750 won in Seoul, the steepest weekly drop in the MSCI Asia Pacific Index. The company’s parent applied for court receivership and halted the 1.2 trillion won ($1 billion) sale of a 31 percent stake in Coway to buyout fund MBK Partners Ltd.
PT Bumi Resources (BUMI) dropped 13 percent in Jakarta after Bumi Plc, the London-listed Indonesian coal venture founded by Nathaniel Rothschild, started a probe into alleged irregularities at the company. Relations between Rothschild and Bumi Co-Chairman Indra Bakrie soured last year after the U.K.- based financier urged a “radical cleaning up” of Bumi Resources, which is 29 percent owned by Rothschild’s firm.
United Spirits surged more than 20 percent in Mumbai. Diageo Plc is in talks to buy a stake in the maker of whiskies and other alcoholic beverages, the companies said in a statement.
To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Adam Haigh in Sydney at ahaigh1@bloomberg.net
To contact the editor responsible for this story: John McCluskey at j.mccluskey@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Current-Account Gap Narrows in Boost for Singh Rupee Rally By Kartik Goyal - Sep 28, 2012

India’s current-account deficit narrowed last quarter from a record, boosting the outlook for the rupee as a policy overhaul by Prime Minister Manmohan Singh to revive economic growth buoys the currency.
The shortfall in the broadest measure of trade was $16.4 billion in the three months ended June 30, compared with a $21.7 billion gap from January through March, the Reserve Bank of India said in a statement yesterday. The median of 16 estimates in a Bloomberg News survey was a $14.2 billion deficit.
The rupee is among the world’s best performers versus the dollar since Sept. 13, climbing about 5 percent as Singh unveiled steps to contain a fiscal deficit and spur investment after months of inaction that hurt Indian expansion. The government is striving to avert a credit-rating downgrade that may disrupt the inflows of foreign capital needed to fund the current-account gap.
“Pain on the deficit front seems to be easing for now and comes along with the reform initiatives,” said Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd. “If the government maintains the pace, it will be positive for sentiment and the currency.”
The rupee strengthened 0.3 percent to 52.86 per dollar yesterday, paring its drop over the past year to 7.8 percent. The BSE India Sensitive Index (SENSEX) of stocks rose 1 percent, while the yield on the 8.15 percent bond due June 2022 declined to 8.15 percent from 8.16 percent on Sept. 27.

Oil Imports

The current-account deficit last quarter was equivalent to 3.9 percent of gross domestic product, yesterday’s report showed. The trade gap narrowed to $42.5 billion from $51.7 billion in January-to-March.
India imports about 80 percent of its crude oil, while Europe’s debt crisis has crimped the nation’s overseas sales, contributing to its trade shortfall. The South Asian nation is also the world’s biggest bullion buyer. The government doubled the import tax on gold bars and coins to 4 percent in March to deter inward shipments of the metal.
The administration announced a 14 percent increase in diesel prices on Sept. 13, the first rise in more than a year, to pare fuel subsidies that have stoked India’s budget shortfall.
Singh opened the retail, aviation, energy and broadcast industries to more foreign investment the next day, countering opposition to the revamp by saying the moves are necessary to rejuvenate the economy, spur expansion and generate jobs.
The current-account deficit widened to an unprecedented $78.2 billion in the fiscal year ended March, or 4.2 percent of GDP, compared with the 2.5 percent considered sustainable by the Reserve Bank.
Growth in the Indian economy slumped below 6 percent in the past two quarters, the weakest performance since the global recession in 2009. Fitch Ratings and Standard & Poor’s reduced the outlook on India’s credit rating to negative from stable earlier this year, imperiling its investment-grade status.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

India Retains Borrowing Goal as It Tackles Widest BRIC Deficit

By Bibhudatta Pradhan and Abhijit Roy Chowdhury - Sep 27, 2012

The Indian government left the target for debt sales in the second half of the fiscal year unchanged after stepping up efforts to pare its budget deficit.
The Finance Ministry plans to raise 2 trillion rupees ($37.7 billion) in the six months ending March, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi yesterday, retaining the goal given earlier this year. Bond sales in April through September will reach 3.7 trillion rupees following an auction due today, according to central bank data.
India’s budget deficit is the widest among major emerging nations as slower growth hurts tax receipts and subsidies fan spending, imperiling the government’s goal of narrowing the gap to 5.1 percent of gross domestic product from 5.8 percent last year. Officials boosted diesel prices this month to restrain expenditure on compensation for below-cost sales.
“When growth is slowing, it will be very challenging to meet the deficit target and the government will have to resort to extra bond sales later,” said Ashutosh Datar, an economist at IIFL Ltd., a Mumbai-based brokerage. Bond yields may come under pressure if debt supply rises, he said.
The yield on the 8.15 percent bond due June 2022 fell to 8.16 percent yesterday from 8.17 percent on Sept. 26. The BSE India Sensitive Index (SENSEX) of stocks declined 0.3 percent, while the rupee strengthened 0.9 percent to 53.0263 per dollar.

Singh’s Overhaul

Sovereign-debt issuance will exceed the 5.69 trillion rupees target for the year ending March 31 by 500 billion rupees, according to the median of eight estimates compiled by Bloomberg before yesterday’s release.
Prime Minister Manmohan Singh followed the 14 percent rise in diesel tariffs, the first in over a year, with steps to open the economy to more foreign investment, encourage capital inflows and bolster the stock market.
The burst of policy changes snapped months of inaction that dimmed India’s outlook, weighed on the rupee and increased the odds of a credit-rating downgrade.
The rupee has strengthened 2.4 percent against the dollar since Singh began the overhaul on Sept. 14, paring its drop in the past year to about 8 percent.
The prime minister is trying to trim a subsidy bill for food, fuel and fertilizer by 12 percent to 1.9 trillion rupees in the year through March 2013. The government also aims to raise 300 billion rupees from share sales by state companies.

Budget Deficit

It set a budget-deficit target of 5.1 percent of GDP for the year in the budget released in March. Citigroup Inc. estimates the shortfall will be 5.9 percent and Crisil, Standard & Poor’s local unit, forecasts 6.2 percent.
The fiscal gap in the four months through July was 51.5 percent of the annual goal of 5.14 trillion rupees.
The Reserve Bank of India has signaled that narrowing the budget gap is pivotal to increasing room for interest-rate cuts to bolster economic expansion, which weakened to a nine-year low of 6.5 percent in 2011-2012.
Palaniappan Chidambaram pledged in August to unveil a plan for fiscal consolidation after becoming finance minister the previous month.
His ministry expects a budget gap of about 5.3 percent of GDP this financial year, two officials with knowledge of the matter said Sept. 21, asking not to be identified as the projection isn’t public.
Standard & Poor’s and Fitch Ratings reduced the outlook on India’s credit rating to negative from stable earlier this year, bringing the nation a step closer to junk status on weakness such as fiscal and trade imbalances.
To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Singh Policy Steps Augur Bumper Budget With Eye on Vote: Economy

By Unni Krishnan and Andrew MacAskill - Sep 26, 2012

Indian Prime Minister Manmohan Singh’s biggest opening to foreign companies since taking office in 2004 boosts odds of an expansionary budget in February to defuse populist opposition to the moves.
Undermined by political allies that opposed his initiatives, and facing the weakest growth since the 2009 global recession, Singh this month took a page out of his two-decade old playbook. The former finance chief, who started dismantling regulations in the early 1990s, opened retail, aviation and energy markets to overseas investors and plans to head a new board that will approve major infrastructure projects.
To cope with the political fallout, which has already included a national strike and the defection of his largest coalition partner, and set the Congress Party up for elections due in 2014, Singh may next focus on measures to alleviate poverty. Steps could include expanded rights for the poor to buy grains at subsidized rates, said economist Laveesh Bhandari.
“These are the last of the reform measures and as we enter the election mode we will see populist measures,” said Bhandari, director of Indicus Analytics Pvt. Ltd., an economics research firm in New Delhi. The Sept. 14 package from Singh’s administration “does nothing for growth in the short term, but it is to unleash the animal spirit,” he said.

Top Performer

India’s rupee has been the best performer against the dollar among emerging markets since Singh’s announcements, climbing 3.5 percent. The currency had tumbled to a record low in June as economic growth slumped below 6 percent and policy stagnation hurt investor confidence in the nation’s prospects of living up to its billing as a BRIC powerhouse.
Singh is gambling that the long-delayed opening measures will revive economic growth in time to salvage Congress’s fortunes before a general election due by May 2014. Goldman Sachs Group Inc. predicts the restructuring will help lift growth to 7 percent in the year through March 2014, while staying below the average of about 8 percent in the past decade.
“Separately, these reforms are incremental steps, but when taken together, they could have a large impact on market and corporate confidence,” Tushar Poddar, an economist at Goldman Sachs in Mumbai, wrote in a Sept. 21 report. “There are clearly a number of risks to the reform process, especially the uncertain political environment.”
The Bombay Stock Exchange’s Sensitive Index has gained 2.6 percent since the changes were unveiled, compared with a 0.8 percent advance for the MSCI Asia Pacific Index.

Pledge Fulfilled

After announcing plans to allow foreign retailers to open supermarkets during a parliament last year, rival political parties used the assembly as a venue to vent their opposition, blocking proceedings for two weeks. The government eventually announced it would withdraw the policies. In December, Singh vowed in an interview with Bloomberg News that he would revive the opening of the retail industry in 2012.
Singh’s latest initiatives may take time to bear fruit. Wal-Mart Stores Inc., the world’s largest retailer, which operates 17 wholesale outlets in India in a tie-up with billionaire Sunil Mittal’s Bharti Enterprises, will take 12 to 18 months to open retail outlets in the world’s second-most populous country, Scott Price, head of Wal-Mart’s Asia operations, said in a Sept. 21 interview in Hong Kong.
Singh’s decision to push through the reforms cost him the support of his biggest coalition ally, the Trinamool Congress, whose ministers quit in protest, leaving the government about 24 seats short of a parliamentary majority. The changes don’t require the approval of the legislature, which is in recess and doesn’t meet again until November.

Election Looms

“Congress wanted to get these reforms out of the way because they are necessary,” said N.R. Bhanumurthy, a New Delhi-based economist at the National Institute of Public Finance and Policy. “Then it will want to start focusing on more populist, vote-winning policies next year which have the best chance of delivering the election.”
To fund a pre-election budget, Finance Minister Palaniappan Chidambaram may have to accelerate the sale of state assets or increase India’s record borrowings.
Government debt sales will rise by 9 percent in the year ending March 31, overshooting Chidambaram’s 5.69 trillion rupee ($106 billion) target by 500 billion rupees, according to the median of eight estimates from investors and analysts compiled by Bloomberg. The government is expected to announce its debt schedule for the second fiscal half today.

Growth Slumps

India’s gross domestic product rose 5.5 percent in the three months through June from a year earlier, holding near a three-year low of 5.3 percent in the previous quarter.
China has also seen its expansion moderate, with a report today showing industrial company profits down 3.1 percent in the first eight months this year compared with a year earlier.
German unemployment probably remained at 6.8 percent in September, according to the median forecast in a Bloomberg News survey ahead of a report due today. The U.K. is scheduled to publish revised second-quarter economic growth estimates.
The U.S. also releases revised economic growth figures, as well as data on weekly initial jobless claims and pending home sales.
Among India’s challenges are infrastructure bottlenecks that have contributed to keeping the nation’s inflation in excess of 7 percent, restricting the central bank from cutting interest rates to aid growth.

Grid Shutdowns

This month’s initiatives include plans to speed up approvals for projects, along with a debt restructuring for electricity companies to give them more cash to invest in new plants in the aftermath of this year’s north India power grid shutdowns that highlighted deficiencies. Singh will chair a new board to clear infrastructure projects worth more than 10 billion rupees.
“In India it’s never clear what a final approval is,” said Samiran Chakraborty, an economist at Standard Chartered Plc. in Mumbai. “So this should help to accelerate the process.”
The first political test for the Congress party since unveiling the changes comes with provincial elections next year. Votes will take place in Gujarat and Himachal Pradesh by mid- January, with key ballots in Karnataka in June, followed by Madhya Pradesh, Rajasthan and New Delhi. Karnataka and Madhya Pradesh, which combined have more than 130 million people, are ruled by the chief opposition group, the Bharatiya Janata Party, and will be main battlegrounds in the general election.

Sonia’s Role

One benefit is a perception of support for Singh and Chidambaram’s initiatives among Congress’s leadership. The Congress Working Committee -- the party’s highest decision- making body, and led by its president, Sonia Gandhi -- backed the economic changes at a meeting on Sept. 25.
A swathe of populist policies before the 2014 election would mimic Singh’s winning formula in 2009, when Congress announced it would write off farmers’ loans to shore up rural support. At the same time, the need to retain votes may prevent Singh from tackling some areas, said Satish Misra, a political analyst at the Observer Research Foundation in New Delhi.
“It’s a good start,” said Misra. “This will go down well with international and foreign financial investors. There will be incremental reforms to boost growth but the government will not dare to attempt controversial reforms like foreign investment in insurance and pensions.”
Unlike foreign investment in retail and aviation, which are enacted under existing laws, opening insurance, pensions and banking would require approval in parliament, where Singh must now rely on smaller regional parties outside his coalition to get measures passed.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Reliance Industries Said Likely to Bid for Spectrum By Ketaki Gokhale and Santosh Kumar - Sep 25, 2012

Reliance Industries Ltd. (RIL) is likely to bid for Indian mobile-phone spectrum in November as billionaire Mukesh Ambani seeks to complement his broadband business, according to a person with knowledge of the matter.
Reliance, India’s most-valuable company, was among the potential bidders at a meeting in New Delhi with the Department of Telecommunications, which will open the application process for second-generation airwaves starting Sept. 28, the person said, asking not to be identified because the details aren’t public. The auction of licenses, canceled in February after an investigation into their sale in 2008, must begin by Nov. 12.
Entering the auction would mark Ambani’s first foray into India’s mobile-voice services, the world’s largest market after China, since handing over the business to his brother, Anil, when they broke up India’s second-biggest industrial group in 2005. The licenses would supplement the broadband Internet services Reliance plans to offer with the fourth-generation spectrum it purchased two years ago.
“In India you do need to have a basic 2G voice service to attract customers,” said Naveen Kulkarni, an analyst at MF Global Sify Securities India Pvt. in Mumbai. “Customers want a one-stop solution, they want a vendor who can provide them all kinds of services. If an operator only offers 4G data services he may not be able to amass a sizable customer base in the current environment.”
A telephone call and e-mail to Reliance’s corporate communications department weren’t answered. The company’s shares gained 0.4 percent to 839.75 rupees in Mumbai yesterday.

Corruption Scandal

The telecommunications department must allocate the spectrum by Jan. 11, India’s Supreme Court said in an Aug. 27 ruling. The government faces being charged with contempt of court if the schedule isn’t met, the judges said.
The nation’s highest court canceled the 2G licenses after sales of the permits in 2008 sparked India’s biggest corruption probe, leading to the jailing of the former telecommunications minister. India’s auditor said in 2010 the sale of the airwaves lacked transparency and ineligible bidders bought them at “unbelievably low” prices, denying the treasury of as much as $31 billion.
The Indian joint ventures of Telenor ASA (TEL), Emirates Telecommunications Corp. (ETISALAT) and Russia’s AFK Sistema lost their licenses.
Reliance, which operates the world’s largest refining complex, started moving back into telecommunications in June 2010 when it agreed to pay 48 billion rupees ($901 million) for control of Infotel Broadband Services Ltd. That deal came hours after Infotel bid 128.5 billion rupees for wireless broadband Internet licenses across India.

‘Forging Relationship’

Reliance is preparing for an entry into the 4G data services market with an “asset-light approach” and by “forging relationships with global players,” it said in a presentation to investors last year.
Under a 2005 agreement, Mukesh Ambani, 55, kept the family’s petrochemicals, oil and gas units and Anil Ambani, 53, got the power, telecommunications, financial services and entertainment units. The brothers said in May 2010 they were scrapping an accord not to expand into each other’s businesses.
Anil’s Reliance Communications Ltd. (RCOM), India’s third-largest mobile-phone company, on Aug. 11 reported first-quarter profit that missed analysts’ estimates as rising competition and finance costs squeezed margins.
To contact the reporters on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

BHEL Said to Seek $500 Million Europe Purchase: Corporate India By Abhishek Shanker and Rajesh Kumar Singh - Sep 24, 2012

Bharat Heavy Electricals Ltd. (BHEL), India’s biggest power-equipment maker, may buy a European provider of metro-rail technology for as much as $500 million to help revive profit growth from a three-year low.
The company plans to use part of its 67 billion rupees ($1.3 billion) of cash reserves and raise debt to fund the purchase, two people familiar with the plans said. Bharat Heavy has identified targets in Italy and the Netherlands and the acquisition may be completed by March 31, said the people, asking not to be identified the talks are private.
The state-owned company is seeking to expand its transportation business to tap metro-rail networks being built in seven Indian cities at an estimated cost of $21.5 billion. Bharat Heavy’s profit may drop for the first time in a decade according to a survey of 37 analysts compiled by Bloomberg, as competition from Chinese rivals including Shanghai Electric Group Co. (601727) and Dongfang Electric Corp. drives down prices, while lack of fuel prompts utilities to delay projects.
“It’s imperative for Bharat Heavy to diversify,” said Lakshminarayana Ganti, an analyst with Standard Chartered Securities in Mumbai, who rates the stock underperform. “The power business is fraught with challenges. The company has rightly identified areas like turnkey project implementation, transport and renewables as new focus areas.”
Profit at the maker of turbines, boilers and switchgear may drop 11 percent to 62.86 billion rupees in the year ending March 31, according to the survey

Sustaining Growth

Bharat Heavy shares have declined 23 percent in the past year, compared with a 16 percent gain in the benchmark Sensitive Index. (SENSEX) They rose 6.7 percent to 247.85 rupees yesterday, the highest in five months.
“Deals are waiting to happen in the technology space in Europe,” said Vijaya Sampath, a senior partner at Lakshmi Kumaran & Sridharan, a Mumbai-based legal firm that specializes in corporate law. “Most of these are family-owned businesses, which are facing liquidity issues or the younger generation wants to sell out.”
Economic and business challenges will make it difficult for the company to sustain past growth rates in the near term, Chairman B. Prasada Rao said in an address to shareholders on Sept. 19. Bharat Heavy earned 76 percent of its revenue from power equipment last financial year and 22 percent from its transport business, which makes electric locomotives and electrical systems for urban rail networks.
The company’s market share in power equipment almost halved to 51 percent in the five years ended March 31 as competition from overseas and local rivals such as BGR Energy Systems Ltd. (BGRL) and Larsen & Toubro Ltd. (LT) intensified.

‘Panic Price’

Prices of boilers, turbines and generators together have fallen 22 percent to 23 million rupees a megawatt, which is “the ultimate panic price,” Pritesh Chheda, Prerna Jhavar and Harshad Shukla, analysts at Emkay Global Financial Services in Mumbai, wrote in a report dated Sept. 20. The average price of the equipment in the previous two to three years was 29.5 million rupees, they said.
Bharat Heavy is expected to maintain its profitability until the financial year ending March 2014 because of orders booked at higher prices, Ganti said, adding that the company’s profit margin is expected to shrink.
Power companies such as Reliance Power Ltd. (RPWR), JSW Energy Ltd. and GVK Power & Infrastructure Ltd. have deferred projects worth at least $35 billion, citing shortage of coal and natural gas, which together fire 66 percent of India’s electricity generation capacity. State-run NTPC Ltd. (NTPC) cut its expansion target by 11,000 megawatts, or 44 percent, for the five years ending March 2017 because of coal shortages.

Half Capacity

About 30,000 megawatts of capacity at existing power plants is lying idle because of coal and natural gas shortages, said Ashok Khurana, director general at the Association of Power Producers, a lobby group for the nation’s generation companies.
As much as $35 billion of debt at state distribution utilities is also hurting the power industry. The utilities, whose tariffs are lower than their costs, have had to cut back on electricity purchases as coal costs increase.
NTPC, the country’s biggest power producer, was forced to cut generation by 13 billion kilowatt hours, or 6 percent of its total production, in the year ended March 31, as state government utilities reduced purchases, Chairman Arup Roy Choudhury said on Aug. 7. The company may have to cut output by almost as much this year.
“As long as these concerns prevail, companies will be reluctant to place new orders,” Khurana said.

Sound Decision

The challenges in the power industry make Bharat Heavy’s push in urban-rail equipment a sound decision, said Standard Chartered’s Ganti.
The government is encouraging Bharat Heavy to “seriously get into” urban transportation, Chairman Rao told analysts in an earnings call on July 26. The company is focusing on metro- rail transportation as about 30 Indian cities are planning to build the networks.
Bharat Heavy plans to bid for a Delhi Metro Rail Corp. project, Rao said on the call, without elaborating. The company also plans to increase production of railway locomotives by 50 percent to 75 this year, he said.
“We are not increasing our presence in the transportation sector because we are despondent about our power business,” Bharat Heavy Finance Director P.K. Bajpai said in a phone interview. “We are doing so because we don’t want to be a peripheral player in anything that we do.”
To contact the reporters on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net; Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

Xi-Li Inherit Weakest Economy Growth Since Deng Opened China By Bloomberg News - Sep 23, 2012

China’s new leaders are poised to inherit the weakest economic growth since Deng Xiaoping three decades ago and may need to borrow from his market-opening tool kit to avert a steeper decline.
As the Communist Party prepares to anoint Vice President Xi Jinping, 59, and Vice Premier Li Keqiang, 57, next month as its so-called fifth generation in charge, data from exports to production signal the government will struggle this year to reach its 7.5 percent expansion target. The retiring top echelon took power in 2003 with growth above 9 percent and their predecessors were bequeathed a 14 percent pace in 1993, a year after Deng toured the southern boomtowns he’d spawned, urging more change.
U.S. and European consumer spending that fueled expansion for decades is waning, while the young labor force that filled China’s factories is starting to shrink. Unless Xi and Li can succeed where their predecessors came up short and curb state enterprises, boost access to credit for private companies and raise consumption, annual growth could slump to about 4 percent by 2014, according to Roubini Global Economics.
“China faces its most pivotal challenges in more than a decade, with a structural economic slowdown coinciding with a major political transition,” said Ramin Toloui, global co-head of emerging-markets portfolio management in Singapore at Pacific Investment Management Co., which operates the world’s largest bond fund. “The old-growth model is gone, but there is not yet a clear and present plan for replacing it.”

Expansion Driver

China’s slowdown is adding to headwinds complicating the global economy’s struggle with Europe’s debt crisis and stunted U.S. job gains. China’s economy, the world’s second-largest, accounted for 36 percent of expansion last year.
Toloui, who helps manage $100 billion in emerging-market bonds at Pimco, sees China’s growth moderating to 7 percent in 2013 and remaining at about the same level through 2015, compared with about 10 percent since Deng began dismantling Mao Zedong’s command economy in the 1980s. Pimco has $10 billion invested in Chinese corporate bonds, yuan debt issued in Hong Kong and currency contracts, Toloui said.
“The global economy has become hooked on supercharged Chinese growth, and we’re not going to have that in future,” said Susan Shirk, chairwoman of the 21st Century China Program at the University of California-San Diego, who was responsible for China at the U.S. State Department from 1997 to 2000. “For the past decade to 15 years, we’ve had a reversal of the reform impulse and the challenge is to get that back on track.”

Overcome Opponents

The next generation of leaders must overcome opponents of change, including state-owned companies and banks that are “powerful, resourceful and resolute in protecting their interests,” according to a February report by the World Bank and the Development Research Center of China’s State Council.
While former Premier Zhu Rongji continued Deng’s legacy of reducing the government’s role by closing some state-run companies in the 1990s and firing millions of workers, the public-sector retreat slowed under current President Hu Jintao and Premier Wen Jiabao. Since 2003, policy has shifted toward supporting state-owned enterprises as a source of strength, Beijing-based GK Dragonomics wrote in a May 24 report.
“The political system has been captured by vested interests,” said Minxin Pei, a professor who specializes in China at Claremont McKenna College in California. “If you want to change the status quo, these interest groups are going to lose out. They are inside the system and will resist.”

Consumer Grail

Officials have vowed since at least 2006 to make domestic consumption an engine of expansion, even as its contribution to GDP slumped to about 35 percent this year from 44 percent a decade ago, according to Capital Economics Ltd. in London.
“Consumer consumption in China is not increasing at a significant rate, contrary to everybody’s hopes,” said Fred Smith, chief executive officer of FedEx Corp. (FDX), operator of the world’s largest cargo airline, on a Sept. 18 analyst conference call. “The locomotive that has driven China’s growth is its export industries, and with the situation in Europe and to a lesser degree in North America, that is a significant issue for the Chinese economy.”
China’s overseas shipments rose less than 3 percent for a second consecutive month in August, industrial output grew at the slowest pace in three years, and foreign direct investment fell for a ninth month out of 10.

Optimism Dims

Manufacturers and retailers have grown less optimistic about sales, with more employers cutting back jobs, a quarterly survey compiled by New York-based research group CBB International LLC showed today. The number of companies reporting net hiring gains this quarter fell nine percentage points to 32 percent, according to the report, which is modeled on the U.S. Federal Reserve’s Beige Book.
Another challenge is that China’s pool of 15-to-24-year- olds -- a mainstay for factories making cheap clothes, toys and electronic products -- will shrink by about 67 million by 2030, according to the United Nations. As the economy moves more toward services, labor shortages will worsen, reaching a shortfall of almost 18 million workers by 2017, said Tao Dong, Credit Suisse Group AG’s Hong Kong-based head of Asia economics excluding Japan.
China’s new leaders can unleash new sources of growth by developing services, getting capital to more innovative private companies, boosting wages, and bolstering pension plans and health care, said Stephen Roach, former nonexecutive chairman at Morgan Stanley in Asia.

Urbanization Trend

He said China still has lots of “low-hanging fruit” to harvest from urbanization, with the Organization for Economic Cooperation and Development estimating as many as 300 million more people will move from the countryside by 2030 to join 600 million already living in cities. With higher-paying jobs, these migrants will boost consumption and trigger more infrastructure and housing construction if the government can improve the social safety net, said Roach, now a senior fellow at Yale University in New Haven, Connecticut.
“The focus has been on expanding the number of people covered by the plans, but not on increasing the benefits,” Roach said. “Until they do that, there’s a risk that all the labor income that China generates through new jobs and urbanization will be saved and not spent.”

Savings Rate

China’s savings rate is estimated at more than 50 percent of GDP this year, the highest among major economies, exceeding 31 percent in India and 13 percent in the U.S., according to the International Monetary Fund.
To boost services, China’s government needs to “get out of the way,” said Stephen Green, head of Greater China research with Standard Chartered Plc in Hong Kong. The new leaders must simplify rules and reduce the involvement of state and provincial governments in businesses such as real estate, hotels, financial services and entertainment, he said.
“This kind of supply-side reform will make or break the growth outlook for the next decade,” Green said. “The real danger” is “a gradual descent into a rigid, uncompetitive and more state-dominated economy, growing only at 3 to 4 percent and vulnerable to shocks.”
The incoming officials should deliver “quick wins” and address short-term risks, said the World Bank and Development Research Center report. These include increasing the flexibility of bank deposit and lending rates, narrowing interest-rate spreads, increasing dividends that state-owned enterprises pay to the national budget and raising the retirement age, currently 60 for men and as high as 55 for women.

Services Gains

The transition to more service-based growth will create investment opportunities in stocks such as Shanghai-based Wuxi PharmaTech (Cayman) Inc. (WX), China’s biggest provider of research and development services for drug companies, said Charlie Awdry, a fund manager at Henderson Global Investors Ltd. in London.
“We are not interested in guys that manufacture T-shirts in China because that’s a sunset industry that is moving offshore,” said Awdry, whose firm had 63.6 billion pounds ($103 billion) in assets at the end of June. “We are interested in guys like Wuxi who are looking to help the big western companies develop their drugs in China and reduce their R&D costs.”
Wuxi’s stock price may surge almost 53 percent within 18 months, from $14.40 on Sept. 21, estimated Ingrid Yin, a New York-based analyst at Oppenheimer & Co. Awdry said he also owns shares of Baidu Inc. (BIDU), China’s biggest Internet search engine, and Tencent Holdings Ltd. (700), its biggest Internet company, partly because the Web is at “the epicenter of all these positive trends of rebalancing and income growth.”

Spending Power

Rising spending power prompted Templeton Emerging Markets Group to hold fashion retailer Giordano International Ltd. (709) and China Merchants Bank Co. (600036), which “reach down into the middle-and even the lower-middle class,” said Hong Kong-based Executive Chairman Mark Mobius, who helps manage $40 billion.
China’s GDP is more than 129 times bigger than in 1978, when Deng ditched hardline Communist policies. His order the following year to create a special economic zone in Shenzhen sparked a market-driven boom that would transform the nation’s economy, luring manufacturers from Hong Kong and Taiwan with tax breaks and cheaper labor.
Other zones sprang up along the coastal belt, following an investment-export formula that propelled industry and construction, driven by what Goldman Sachs Group Inc. called the fastest investment rate of any country it could find in history. That rate is “likely to decline” from about 46 percent of GDP even as it remains a key contributor to growth, Goldman Sachs said in a Sept. 3 note.

‘Not Over’

“China’s investment story is not over,” said Wang Tao, an economist with UBS AG in Hong Kong. “The issue is the pace of investment and to make it sustainable and less wasteful.”
The National Development and Reform Commission this month published approvals for infrastructure projects, including as many as 2,018 kilometers (1,254 miles) of roads, that Nomura Holdings Inc. estimates will cost about 1 trillion yuan ($158 billion). This means that the government still is relying on investment to support expansion in the short term, Wang said.
The men poised to take the helm have given mixed signals about their desire to fashion a more balanced economy. Xi is known both for his market-friendly approach and his support for state-owned enterprises, said Cheng Li, a China scholar at the Washington-based Brookings Institution.

Princeling Leader

He’s a so-called princeling -- a child of Xi Zhongxun, one of the nation’s leading revolutionary figures, whom Deng chose to oversee the economic transformation of Guangdong province, which includes Shenzhen.
As Xi rose through the party ranks, he governed provinces including Zhejiang, home to some of China’s richest private companies, and Shanghai, the commercial capital. He developed a reputation for fighting corruption -- leading an anti-graft campaign in Zhejiang and taking over Shanghai after a 3.7 billion-yuan corruption scandal that brought down the city’s previous party chief, Chen Liangyu.
While Li has championed low-cost housing and improved health care, he may lack Zhu’s “political courage” and “Wen’s quick sense of how to respond to crises,” said Brookings’ Li.
Neither of the two are “big thinkers like Deng,” with the political might to push through economic restructuring, said Melanie Hart in “China’s Real Leadership Question,” an August report from the Washington-based Center for American Progress.

Political Challenges

Even without the economic challenges, the new leaders face a raft of social and political problems. Thirty years of largely unbridled industrial waste will cost at least 680 billion yuan to clean up, estimates the Washington-based International Fund for China’s Environment. The nation’s rural wealth gap last year neared a level the UN says may spawn social unrest. And escalating tension with neighbors from Japan to Vietnam over territorial disputes has led to attacks on Japanese factories in China and the closing of Japanese retail stores there.
China’s new leaders also may suffer from a period of relative inertia as they concentrate on consolidating power within the upper strata of the party, said Steve Tsang, director of the China Policy Institute at the University of Nottingham in England. The ouster in April of former Chongqing leader Bo Xilai from the ruling Politburo created the country’s biggest political scandal in a generation.
All this may further hamper their desire to take on financial institutions and other state businesses. The World Bank and Development Research Center report recommends setting up a commission, supported by top leaders, to deal with enterprises that enjoy partial or full monopolies and benefit from special relationships with decision makers. Postponing market-driven change could “risk the possibility of an economic crisis,” the report said.
Or as Deng once put it: “Reform is China’s second revolution.”
--Kevin Hamlin. With assistance from Mike Forsythe in Beijing. Editors: Adam Majendie, Melinda Grenier
To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net