Is China the new idol for emerging economies?

The Emerging Markets course is back and this time it's going to be all about - China.

Here's a very interesting talk on TED that was aired recently. It's by Dambisa Moyo an international economist who analyzes the macro-economy and global affairs.

http://www.ted.com/talks/dambisa_moyo_is_china_the_new_idol_for_emerging_economies.html

Evolving Banking Structure in Emerging Markets!

Brazil, Russia, India and China, popularly called together as BRIC countries, are increasingly becoming the centre of attraction for the rest of the world. The factors which led to it are the strong and growing market, steady growth even in the crisis period, strong financial system and banking environment and demographics. The banking sector, which drives the economy has been steady and evolving continuously. The Asian Financial Crisis of 1997 along with other macroeconomic factors had led the banking industry of emerging markets to open up and increased control of their state owned banks.

Indian Banking Sector

Indian Banking sector has evolved over the period of time. The nationalization of banks in 1969 and the liberalisation of the economy in 1991 were the turning points in the overall banking sector. Since then, it has been one of the strongest and stable banking sector in the world.

With globalization and growing needs of the economy, there has been changes proposed to improve the efficiency of the banking sector in all forms. The latest RBI report on “Banking structure in India- The way forward” deals with the following changes:

• Small Banks—Small local banks play an important role in giving credits and loans to SMEs and agricultural and banking services in unbanked and under-banked regions. These are the preferred vehicles to financial inclusion. This is similar to the community banks in the US which account for 46% of the total loans to small businesses. Small banks system would entitle more and more people to access the benefits of the financial services in our country.
• Universal Banking—A combination of commercial banking, investment banking, development banking, insurance and other financial activities. Conversion of banks into universal banks would bring in the benefits of Investor’s trust, Resource Utilization, Economies of Scale, Profitable Diversification and one stop shopping for all financial services.
• Foreign banks in India— Foreign banks with required balance sheet size and deposits could convert themselves into wholly owned subsidiaries. However, this is not mandatory for new banks wanting to establish their branches in India. The presence of foreign banks would increase the competition and efficiency of the entire banking structure. The merger and acquisitions in the banking industry is also allowed to the investor’s interests.
• Reorientation of the banking structure—This would comprise of four tiers. The first tier would comprise of large Indian banks and some foreign banks as well. The second tier would consist of mid-sized banks including niche banks with economy wide presence. The third tier would encompass old private sector banks, rural banks and regional banks. The fourth tier would have small privately owned banks and cooperative banks.

Banking in China

China’s largest banks called the Big Four namely Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank are under state control. Post 2000, Chinese banks have had the policy of easy credit. After the 2008 recession, Chinese banks gave out huge loans using the easy credit policy. This was done to boost the real estate sector.

The evolving structure of banking in China talks mostly of the shadow banking. It is the system of credit intermediation that involves entities and activities outside the regular banking system.

• It involves direct lending to the real sector and shadow banks are closely tied to commercial banks.
• It fostered the needs of the traditional banking which could not have been done under the strict rules and regulations. It played an important role in the growth of entrepreneurial activities between 1990 and 2000. However, post crisis growth in this system is raising concerns.
• Liberalization of interest rates—This provides access to cheap capital which is becoming increasingly important for the Chinese industries and small enterprises. It would also encourage banks to get into risky deals which have higher rate of returns and would motivate households to deposit at a better rate of return.

Russian Banking System

Russian Banking system consists of three segments—State controlled banks, domestic private banks and foreign banks. State controlled banks provide loans to the real estate sector, attract the external loans and the risks of their bankruptcy is near zero. Domestic private banks are affiliated with the industries and enterprises. They have to conduct aggressive interest rate policies to compete with the state owned banks. Thus, the structure of their assets is shifting to risky financial instruments. Foreign banks have a positive reputation on the domestic market between the client and legal clients. They give large credits to individuals.

The potential growth in Russian banking will be in strengthening the state controlled and foreign banks. It is not taking steps to deal with the following which forms a part of the evolution:

• Improving the low capitalization of the banking system.
• Improving the short term structures of the baking liabilities to provide medium and long term loans to the real sector.
•  Improving the “interbank trust” between the national banks to strengthen the domestic financial system.

Brazil Banking System

The banking sector is composed of mainly domestic institutions and domestic institutions with foreign partnership. Over the past decade, financial sector assets more than doubled owing to the stable economy, the expansion of the securities and derivatives markets, and money pouring in from institutional investors from home and abroad. Rapid credit expansion in recent years has supported domestic economic growth and broader financial inclusion, but could also create vulnerabilities.

The banking system is now implementing reforms to mitigate these risks:

• Issue regulations on credit bureaus to ensure widely available information about borrowers’ creditworthiness.
• Tighten the criteria for providing assistance to banks, and ensure a secure and adequate source of funding in case of a crisis.
• Shifting the role of state owned banks towards supporting capital market development through crowding-in private sector finance.

Thus, few things which are common to the evolving banking structures in emerging markets are:

• Foreign banks participation
• Privatization of some state owned banks
• Mergers and Consolidations of domestic banks
• Subsidiaries of foreign banks

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This article has been chosen as the best article in Finance for EMpression as part of EMergeon

Written by Prakhar Maheshwari, IMT Hyderabad

EMpression - The Article Writing Competition

#EMpression - Are you a writer? Here's an event for you. Express your thoughts on any of the given topics. We have topics for all the major verticals The best article in each vertical would get a prize money of Rs. 1000. Hurry up. It's a complete #OnlineEvent. Wishing you all the best. Visit the link for further instructions and topics.

To know more about the event, visit http://www.dare2compete.com/competitions/9253/EMpression/Great-Lakes-Institute-of-Management-Chennai

EMvestors - Registration Deadline nearby!

Hi all,

The registration for the Finance Event of EMergon - 'EMvestors' ends today (19-10-13).

Are you a Finance Whiz who is expert in managing portfolios. Then this is an event for you. Apart from the final prize, the top 2 performers of each of the 4 days of Round 1 will also get cash prizes.

So, what are you waiting for? Go ahead and register for the competition.

The link for registration is https://www.facebook.com/emergeon?sk=app_161683100556760&ref=s

To know more about the competition, visit http://www.greatlakes.edu.in/emergeon13/finance/event-intro.html

EMbound Logistricks - First Round

Hi all,

The first round of EMbound Logistricks - the Operations event of EMergeon is going to happen tonight at 10 pm. It is a 40 minute quiz with 30 questions on Dare2Compete.

Are you an expert in Operations? This event will test your Operations skills.

Haven't registered yet? What are you waiting for. Go to 

https://www.facebook.com/emergeon/app_201742856511228 and register your team.

Also, go to http://www.dare2compete.com/quiz/ and register yourself under the Quiz.

All the best for the quiz. May the best team win!

The land of Football, Festival and Fun!

This country is most often related with football, Paulo Coelho and Christ the Redeemer. The ‘B’ of ‘BRICS’ nations today is making its presence felt as one the important Emerging Economies of the World.

Brazil- the largest country in South America and the fifth largest in the world is the cradle of the Amazonian rain forest. With its name drawn from the pau brasil tree, it boasts of having the greatest biodiversity in the word. Brazil’s sheer size accommodates several eco regions including Amazon rainforest, Atlantic forest, tropical Savanna, and wetlands to name a few.

Apart from vibrant fauna and flora, Brazil exudes cultural vibrancy as well. Who doesn’t remember the Rio de Janeiro carnival from Zindagi na milegi dobara? Interesting cultural and ethnic mix is found in Brazil due to its history with Native Americans, Portugese and Africans. Colourful carnivals, soulful Sambas (a music genre) and sumptuous cuisines have long attracted tourists from all over the globe to Brazil.

Brazil has journeyed from being a colony of Portugal in the 1500s to being a federal republic in 1988. Brazil’s economy is the seventh largest in the world with respect to nominal GDP as well as purchasing power parity (2012).

As Brazil grows, it makes itself progressively stronger and more pertinent to a world that will be ruled by emerging powers in the future. And that is why we, along with the rest of the world, are keeping an eye out for this emerging nation.

written by Ranjana, PGDM 12-14.

EMergeon '13 - India's First Management Fest on Emerging Markets!

Hi all,

With great pleasure we announce the arrival of 'EMergon' - India's First Management Fest on Emerging Markets organized by Great Lakes Institute of Management, Chennai.

We have events for the future managers in all the main verticals. We invite you to come forward and participate in our Fest and make it a grand success.

We will constantly keep posting some interesting information in the blog.

Visit us at

www.greatlakes.edu.in/emergeon13

www.facebook.com/emergeon

Abu Dhabi invests in Russia

Abu Dhabi plans to invest $5 billion in Russian infrastructure in a venture to be set up with the country's state-backed private equity fund. This investment will be used to modernise Russia and make its economy more competitive.

Before we talk about the benefits Russia will get from the Abu Dhabi investment, let us look at some facts about the Russian infrastructure

• The transport system is heavily Moscow-centered, with virtually all transportation channels of economic significance emanating from Moscow.
• Commercial transportation relies heavily on rail.
•  The Russian trucking industry is only minimally developed, and roads are not designed to carry heavy and long-distance truck traffic.
• The Russian railway system includes a total of 150,000 kilometres (93,210 miles) of broad gauge rail, making it one of the most extensive railway systems in the world. 
• Of this total only 87,000 kilometres (54,061 miles) is in "common carrier" service.
•  The remaining 63,000 kilometres (39,148 miles) serve specific industries or are dedicated railways lines and are not available for common carrier use.
• The Russian highway system includes a total of 948,000 kilometres (589,087 miles) of road including 416,000 kilometres (258,502 miles) that serve specific industries or farms.

Abu Dhabi is investing in Russia in the following areas:

1.   .  An overhaul of the Trans-Siberian railway.
2.     .   A fast-speed train line connecting Moscow and Kazan.
3.       Construction on the ring road on Moscow’s city limits.

It is obvious that when Russia invests money into developing a modern infrastructure system not only will it fuel economic growth in the form of thousands of jobs created but also would help the country's overall development and economic standing.

Having said that I believe the following points also have to be considered to know if the investment will actually be fruitful for Russia

It is well known that the Russian railways are well established and that the major complaints about Russia is the under development of roads. In that context is it necessary to spend so much more again on the railways in Russia?

 We can see that the growth in Russia is not equally spread. As mentioned earlier all the transportation is Moscow centric and virtually all transportation channels of economic significance emanating from Moscow. When this is the case would it have made more sense to use the money into states which are not so industrialised and have more efficient transportation into those cities rather than concentrating on major cities like Moscow or Kazan?

Another thing we can look into is the corruption index of Russia. Russia ranks 133^rd out of 175 economies in the corruption index and there is a scepticism about whether this investment will also be used by the government exclusively for improving the infrastructure given the corruption levels in Russia.

The project is to be spanned over seven years and Abu Dhabi will put money into Russian infrastructure on a deal-by-deal basis. The deal is expected to be official by the end of 2013. "We believe we can deliver attractive returns investing in Russian infrastructure," said Kirill Dmitriev, chief executive of the state-backed Russian Direct Investment Fund (RDIF).

Only time will tell us whether this investment has been fruitful for Russia in terms of whether building their infrastructure through Abu Dhabi’s funds will actually help the Russian economy growth and make it more competitive.

References:

1) http://www.cnbc.com/id/101026481

2) http://www.nationsencyclopedia.com/economies/Europe/Russia-INFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html

3) http://rt.com/business/emirates-russia-fund-investment-757/

4) http://www.cnbc.com/id/101026481

China- The land of the dragon

China- The land of the Red Dragon.

China has come a long way from what it was in 1978. Since initiating market reforms in 1978, China has shifted from a centrally planned to a market based economy and experienced rapid economic and social development. GDP growth averaging about 10 percent a year has lifted more than 500 million people out of poverty. All Millennium Development Goals have been reached or are within reach.


To know more about China do watch these presentations given by the Pallavas in the class on China:

Section 1:

Section 2:

Craving for more?

Do watch this video which will tell you more about China,its culture,economy,infrastructure etc.

References:

1. http://www.worldbank.org/en/country/china/overview

2. Sharma, Ruchir, "Breakout Nations", Penguin India, 2012 

3.en.wikipedia.org