Still a Long Way to Go for China to attain Financial Liberalization...

What is Financial Liberalization

Financial Liberalization is the process of breaking away from a state of financial repression (which is commonly associated with govt. fixing of interest rates to its adverse consequences on the financial sector as well as on the country's economy). So Financial Liberalization is freeing interest rates, reducing reserve requirements to eliminate the directed credit schemes, while stabilizing the price level. But it is a narrow definition, an obsolete one.

Now, Financial Liberalization also involves easing of portfolio restrictions on banks, changes in the ownership of banks, encouraging competition among banks, integration of domestic entities to international markets and changes in the monetary policy. It includes a freely functioning of foreign exchange markets and eliminating restrictions on current payments and transfers.

What is the state of Banking System in China

(We will be limiting ourselves to the banking system in China after 1949 when the present govt. of People's Republic of China (PRC) came into power.)

Rapid nationalization and consolidation of Chinese banks took place in the initial years of PRC taking over and banking sector was the first sector to be completely socialized. However during the 1980's, banking system expanded and diversified to support reforms. First Stock Exchanges were opened in 1986 which were although small in size of operations like the Shanghai Stock Exchange.

Now lately, Chinese banks are functioning more like banks than before. China's banking system has remained in the government's hands even though banks have gained more autonomy. The People's Bank of China (PBOC) is China's central bank which formulates and regulates its monetary policy. PBOC has full autonomy in applying the monetary instruments like setting interest rates for commercial banks. China Banking Regulatory Commission (CBRC) took over the supervisory role from PBOC in 2003.

The Big Four

There are four mammoth government owned banks in China controlling majority of the money in the financial system of China.

1-      The Industrial and Commercial Bank of China (CBC) is the largest bank in China.

2-      The Bank of China (BOC) specializes in foreign exchange transactions of trade finance.

3-      China Construction Bank specializing in medium to long term credit for long term specialized projects like infrastructure and housing.

4-      The Agricultural Bank of China (ABC) specializes in providing funds to China's agricultural sector and offers banking services to farmers and other rural institutions.

In 1995, the operations of the ‘big four’ were commercialized. These are the first tier banks.

There are also second tier banks in China which are having much better asset quality and profit base. These were supposed to be run by private players but even now, major shareholders of these banks are local governments, and state owned and State controlled enterprises.

There are also more than 200 foreign banking institutions in China but they only play a limited role. Throughout the history of PRC, banking system has exerted close control over the finance and money supply.

Firstly, the interest rates for Chinese banks as well as foreign banks holding the deposits of Chinese citizens are regulated. But from 148 categories of interest rates, only 34 categories now reside under the regulation of the govt. The interest rates for rest are simplified or market driven.

Secondly, at the present indirect financing remains the main channel of financing for business companies. It implies that the stock markets have a very limited and highly regulated role, in case companies want to raise money, where companies (firms) can directly borrow from the public (households). Majorly, they will have to access banks which have all the deposits from general public and borrow the money. Due to this, assets of the banking sector are above 80% of the total assets of the entire financial sector. The BIG FOUR accounted for more than 61% of the loans. Second tier banks have assets somewhere around 14% of the total.

Major Restriction - All govt. departments, publicly and collectively owned economic units and social, political, military and educational organizations were required to hold their financial balances as bank deposits. They were also instructed to keep just enough cash to meet daily expenses. Payments for goods and services exchanged by economic units were only done through banks. “This helped to minimize the need for currency and minimize black money”, is what they say. It meant that besides one’s petty expenses, all other monetary transactions were to be done through banks. Considering that the online banking has just been introduced in China in August, 2010, one could imagine how restrictive and harassing this regulation has been for the Chinese corporations and institutions.

China is slowly de-regulating its banking system to keep pace with the rapid development it is encountering in the past decades. But there is still a long way to go for PRC to become financially liberal and stimulate savings and investments. The sequence of reforms, as in China national policy, is to liberalize the interest rate of foreign currency before that of domestic currency, lending before deposit. Large amount and long term before small amount and short term. As the first step, PBOC liberalized the interest rates for foreign currency loans and large deposits but the interest rates for savings deposits and loans in local currency will still take a long time before being liberalized.

There are still many weaknesses in the regulatory and legal system of China. For eg. there is no legal code to handle bankruptcy of financial institutions nor any regulations governing electronic transactions etc. Beside low capital base of asset quality, banks in China also suffer from poor corporate governance and lack of adequate risk management skill.

I recently saw news on the net that – Chains To Launch New Internet Banking System on August 30, 2010. It will allow depositors to check their separate bank accounts information and make "real-time" inter-bank transfers at one place. It’s mainly online banking system introduced very late in a booming economy hindering growth of commerce. Well.. better late than never.

By- Rahul Bansal
A sincere thanks to Amrita Ma'am for helping me.

Capitalism is a flawed system but other systems are much worse...

If perfection were really an available option, the choice of economic and political system would be irrelevant. In an imperfect world, with limited resources, [the basic problem of economics-scarcity!], the choice is not between capitalism and socialism but imperfect capitalism and imperfect socialism. Note that no country can be purely capitalistic or purely socialistic in nature. [See Notes at the end of the article if you want to know what exactly capitalism, socialism & communism mean]

Despite all its faults, if we were to closely observe the disordered picture of economic progress that we have made in the 20^th & 21^st century-capitalism as the choice of economic system is the clear winner.

Indian Scenario

First let us look into the Indian scenario. Our country has been steadily becoming more capitalistic in nature over the years. In fact, capitalism accounts form 3/4^th of our GDP. A sector wise analysis substantiates this.

Crops are planted & produced in our country according to expected prices/profits. Of course, other variables matter such as rainfall, irrigation and fertilizer use. But the driving force is profits. Capitalism, therefore, defines 17 per cent of India’s GDP, namely agriculture.

Services account for 55% of GDP, if you deduct the government’s share-there is still 40% of the GDP contributed by the private sector.

Some 2/3^rd’s of the manufacturing sector/industry which accounts for 28% of GDP, is purely private. That is another 18% approximately. Moreover most PSU’s are more profit oriented than ever.

Therefore we can comfortably say that capitalism accounts for approximately 75% of our country’s GDP.

Strength of Capitalism

Strength of capitalism lies in the incentive structure mechanism that is integral in a capitalist society. A simple example would help explain why capitalism is better than socialism.

Suppose, there are 4 students in a class- Rahul, Vishal, Aakriti & Tejas. They are awarded grades according to their performance.

The grades awarded were: Aakriti: “A”, Rahul: “B”, Vishal: “C”, Tejas: “D”

According to new rules, the college authorities decide that each student shall be given the same grade i.e. “C”. The new move de-motivates high performers like Aakriti and Rahul as they don’t have any incentive to perform better. Lack of incentive mechanism reduces everyone’s performance and efforts as they know irrespective of how they perform; they are going to get the same grade. Anyone who complained about the new system was chucked out of the chool or suffered severe punishment.

The earlier performance based incentive mechanism represents capitalism in real life, while the new system stands for socialism.

The case of Soviet Union and China-Transition from Socialism/Communism to Capitalism

Prior to 1991, the soviet economy was the second largest in the world, but during its last years as USSR, it suffered huge budget deficits and severe shortage of food, which ultimately resulted in its collapse.

From 1949-1978 China was a soviet style planned economy, during the Era of Mao’s regime. After the death of Mao Zedong, Deng Xiaoping began to reform the economy and transformed into market oriented economy-this started from 1978. The rest as they say is history-China’s meteoric rise as an economic powerhouse pulled millions out of poverty and its economic muscle is only next to U.S.

Even Fidel Castro in a recent interview has admitted that the Communist model has failed in Cuba!

SOCIALISM-The Big Lie of the 20^th Century?

Many term socialism as the big lie of 20^th Century. The strength of capitalism over socialism can be attributed to basically 2 reasons:

(a)Profits & Losses (b) Prices determined by Market Forces

Profits and Losses: In a centrally planned economy there is no way to accurately determine the success or failure of various programs. Which programs should be expanded or which should be contracted/terminated? –cannot be determined in a socialist economy.

In capitalism, since the firms operate with profit motive, there is greater efficiency and competitiveness to deliver superior customer service. Take for example: the telecom services sector in India,there are numerous competitive players in the market like Airtel, Vodafone, Reliance, Tata etc. offering so many different schemes to woo the Indian mobile phone user.

Prices determined by market forces: Capitalism ensures that market prices transmit information about relative scarcity and then efficiently co-ordinates economic activity.

Example: Take the example of OPEC oil crisis of 1970’s. OPEC countries restricted the supply of oil, hence the oil prices increased drastically. Consumers started driving less, car-pooling more, and started using public transportation for commuting. Producers in turn got the incentive of exploring and developing alternative fuels of energy resources.

In Socialism, since price of commodities are set by the government, they are either too high or too low- [in most cases] which leads to constant shortages or surpluses. The commodity prices do not change with the market forces of demand and supply which leads to problems.

Not all is right with Capitalism

Ill effects of capitalism are not due to capitalism but due to corruption of capitalism. There are numerous examples- right from Enron, WorldCom, Satyam to the recent BP oil disaster.

Obsession with the “bottom line” means that the broader concerns of stakeholders are sacrificed for the narrower interests of shareholders.

What we don’t need is “Crony Capitalism” where success of a business is dependent on favoritism-shown by ruling government in the form of tax breaks, government grants and other incentives. Take for example: the recent Vedanta controversy-if Anil Aggarwal had managed to strike a deal with the government for expanding its operations in tribal-occupied Orrisa through favoritism shown by the government-it would have been an example of crony capitalism. {But we must commend the firm stance taken by Jairam Ramesh, the environment minister and PM Manmohan Singh against the issue}

We need Sustainable Capitalism: is a new brand of capitalism which takes into account the long term view includes socio economic development and environmental sustainability.

Fall of Lehman Brothers and the Financial Meltdown-Is Capitalism to Blame?

Contrary to the popular perception, 2008 financial crisis did not take place primarily due to the ill effects of capitalism but due to seriously flawed monetary policy put in place over 2 decades ago by former fed reserve chairman- This encouraged the era of consumerism in America-people began consuming beyond their means as credit was easily available on artificially low interest rates. It increased the risk taking propensity of the average American consumer. However, one should note, that the seriously flawed monetary policy was the primary reason, not the only reason behind the financial collapse.

If Keynesian economics were to work, the current global meltdown would be shallow and short lived-the massive infusion of stimulus capital would have turned around the US economy in a short time. [Keynesian economics-advocated the intervention of central banks via fiscal and monetary policy to undo balances]

But U.S. economy is still deep down a rabbit hole-U.S. will take at least a couple of years to fully recover.

Lessons to be learnt: Many economists worldwide are preaching a new brand of Capitalism called “Controlled Capitalism”, in controlled capitalism-we need limited but controlled interventions in the free market, leaving to self regulate for most market.

From the above discussion we conclude that imperfect capitalism which is sustainable and controlled is the best choice amongst all other systems.

Note:

To put it in simple terms:

Capitalism means the economy in the hands of private sector

Socialism means the economy in the hands of public i.e. Government

Communism: is a broader term than socialism, it includes both the economy and the political system.

However the objectives of socialism and communism are largely the same.

The only exception is China-which has a Communist Government and a imperfect capitalist form of economy-

• Political System: China has a one party system i.e. the People’s Party of China (PPC) controlling the political system. China’s media is highly controlled-In a report released by “Reports without Borders” in 2005-China ranks 159^th out of 167^th in its annual freedom world index. Censorship of Media is a common practice to silence criticism about the government.


• Economy: After the era of Mao Zedong came to an end mainly from 1949-1978, China has largely been a capitalist economy and has become an economic powerhouse over three decades of market oriented reforms and becoming a more globalised and liberalized economy.

I leave you with this a deep thought- a quote by Winston Churchill
"The inherent vice of Capitalism is the unequal sharing of blessings, the inherent blessing of socialism is the equal sharing of misery!"

_____________________________________________________________

By: Tejas Singh

A Case Worth a Study- BRITANNIA Industries

Chairman - Mr. Nusli Neville Wadia

Managing Director- Ms. Vinita Bali

The story of one of India's favourite brands reads almost like a fairy tale. Once upon a time, in 1892 to be precise, a biscuit company was started in a nondescript house in Calcutta (now Kolkata) with an initial investment of Rs. 295. The company we all know as Britannia today.

The beginnings might have been humble-the dreams were anything but. By 1910, with the advent of electricity, Britannia mechanised its operations, and in 1921, it became the first company east of the Suez Canal to use imported gas ovens. Britannia's business was flourishing. But, more importantly, Britannia was acquiring a reputation for quality and value. As a result, during the tragic World War II, the Government reposed its trust in Britannia by contracting it to supply large quantities of "service biscuits" to the armed forces.

As time moved on, the biscuit market continued to grow… and Britannia grew along with it. In 1975, the Britannia Biscuit Company took over the distribution of biscuits from Parry's who till now distributed Britannia biscuits in India. In the subsequent public issue of 1978, Indian shareholding crossed 60%, firmly establishing the Indianness of the firm. The following year, Britannia Biscuit Company was re-christened Britannia Industries Limited (BIL). Four years later in 1983, it crossed the Rs. 100 crores revenue mark.

On the operations front, the company was making equally dynamic strides. In 1992, it celebrated its Platinum Jubilee. In 1997, the company unveiled its new corporate identity - "Eat Healthy, Think Better" - and made its first foray into the dairy products market. In 1999, the "Britannia Khao, World Cup Jao" promotion further fortified the affinity consumers had with 'Brand Britannia'.

Britannia strode into the 21st Century as one of India's biggest brands and the pre-eminent food brand of the country. It was equally recognised for its innovative approach to products and marketing: the Lagaan Match was voted India's most successful promotional activity of the year 2001 while the delicious Britannia 50-50 Maska-Chaska became India's most successful product launch. In 2002, Britannia's New Business Division formed a joint venture with Fonterra, the world's second largest Dairy Company, and Britannia New Zealand Foods Pvt. Ltd. was born. In recognition of its vision and accelerating graph, Forbes Global rated Britannia 'One amongst the Top 200 Small Companies of the World', and The Economic Times pegged Britannia India's 2nd Most Trusted Brand.

Today, more than a century after those tentative first steps, Britannia's fairy tale is not only going strong but blazing new standards, and that miniscule initial investment has grown by leaps and bounds to crores of rupees in wealth for Britannia's shareholders. The company's offerings are spread across the spectrum with products ranging from the healthy and economical Tiger biscuits to the more lifestyle-oriented Milkman Cheese. Having succeeded in garnering the trust of almost one-third of India's one billion population and a strong management at the helm means Britannia will continue to dream big on its path of innovation and quality. And millions of consumers will savour the results, happily ever after.

 

MILESTONES

1892	The Genesis - Britannia established with an investment of Rs. 295 in Kolkata
1910	Advent of electricity sees operations mechanised
1921	Imported machinery introduced; Britannia becomes the first company East of the Suez to use gas ovens
1939 - 44	Sales rise exponentially to Rs.16,27,202 in 1939 During 1944 sales ramp up by more than eight times to reach Rs.1.36 crore
1975	Britannia Biscuit Company takes over biscuit distribution from Parry's
1978	Public issue - Indian shareholding crosses 60%
1979	Re-christened Britannia Industries Ltd. (BIL)
1983	Sales cross Rs.100 crore
1992	BIL celebrates its Platinum Jubilee
1993	Wadia Group acquires stake in ABIL, UK and becomes an equal partner with Groupe Danone in BIL
1994	Volumes cross 1,00,000 tons of biscuits
1997	Re-birth - new corporate identity 'Eat Healthy, Think Better' leads to new mission: 'Make every third Indian a Britannia consumer' BIL enters the dairy products market
1999	"Britannia Khao World Cup Jao" - a major success! Profit up by 37%
2000	Forbes Global Ranking - Britannia among Top 300 small companies
2001	BIL ranked one of India's biggest brands No.1 food brand of the country Britannia Lagaan Match: India's most successful promotional activity of the year Maska Chaska: India's most successful FMCG launch
2002	BIL launches joint venture with Fonterra, the world's second largest dairy company Britannia New Zealand Foods Pvt. Ltd. is born Rated as 'One amongst the Top 200 Small Companies of the World' by Forbes Global Economic Times ranks BIL India's 2nd Most Trusted Brand Pure Magic -Winner of the Worldstar, Asiastar and Indiastar award for packaging
2003	'Treat Duet'- most successful launch of the year Britannia Khao World Cup Jao rocks the consumer lives yet again
2004	Britannia accorded the status of being a 'Superbrand' Volumes cross 3,00,000 tons of biscuits Good Day adds a new variant - Choconut - in its range
2005	Re-birth of Tiger - 'Swasth Khao, Tiger Ban Jao' becomes the popular chant! Britannia launched 'Greetings' range of premium assorted gift packs The new plant in Uttaranchal, commissioned ahead of schedule. The launch of yet another exciting snacking option - Britannia 50-50 Pepper Chakkar
2007	Britannia industries formed a joint venture with the Khimji Ramdas Group and acquired a 70 percent beneficial state in the Dubai-based Strategic Foods International Co. LLC and  65.4% in the Oman-based Al Sallan Food Industries Co. SAOG.
2008	Britannia launched Iron fortified 'Tiger Banana' biscuits, 'Good Day Classic Cookies',  Low Fat Dahi and renovated 'MarieGold'.

 Source- Powerbrands

Ketan Parekh Scam: The Stock and Bull Story

Ketan Parekh is a name which rings a bell in our minds as the man behind one of the biggest scams of Indian stock exchange in 2000-2001. Through this article, I have explained the modus operandi of the “Ketan Parekh Scam” in a simple language without any technical jargon so that even a layman can understand. But before that, let’s get aware about an interesting fact, both Ketan Parkesh & Harshad Mehta, another big swindler of Indian stock exchange are the “infamous” alumni of the same school in Gujarat. God knows what is taught in that school!!!!!

Ketan Parekh-also known as the “Bombay Bull” was a known broker of Indian stock exchange. Over the years, Ketan built a network of companies mainly concentrated in Mumbai. According to market sources, although he was a big broker, he didn’t have enough funds to buy large stocks. He borrowed funds from various companies and banks for this purpose. He used to raise loan from the banks by offering shares as collateral security. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee telefilms, Crest Communications, and PentaMedia Graphics . Ketan selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks.

The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL.

He started trading of these shares within the network of his own companies at no profit no loss with the malafide intention of creating buying pressure for shares of K-10 .Continuous trading by Ketan Parekh within the network of his own companies make other brokers in the market believe that something is happening inside K-10. Thus brokers started buying shares of K-10 for themselves and also urge their clients to buy these shares. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially. HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks.


Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges. HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion.


As such huge amounts of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes.


At that time Ketan thought of selling his shares but it is said that some senior officials of Zee telefilms told him to continue trading till the share value reach Rs 1000 mark and thus Ketan continued. He finally sold all his shares of zee at market price of Rs 1100. Though he earned enormous profits but due to sudden selling of huge number of shares and consequent fall in trading led to a fall in the markets and thus share price fall drastically to around 200 again. Investors lost heavily and many committed suicide. That was what Ketan did.


This scam created a historical impact on financial status of Bombay Stock Exchange and also on faith of investors in its working. Securities and Exchange Board of India (SEBI) was highly criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in shares over an 18-month period prior to February 2001.


Analysts also opined that SEBI's market intelligence was very poor. Analysts commented that if the regulatory
authorities had been alert, the huge erosion in values could have been avoided or at least controlled. Ketan Parekh was sent behind bars immediately though was later released on bail. Currently he has been prohibited from trading in the Indian stock exchanges till 2017. One would have thought that after this scam the regulatory authorities would have became more strict and effective and than we come across the Satyam scam!!!!!!!!

By: Aman Maggu

For reading about the harshad mehta scam: click on the following link: http://kaleidoscopeonline.blogspot.com/2010/02/harshad-mehta-from-pied-piper-of_25.html