| The Global ANALYST || April 2016 |4

C O N T E N T S

COVER STORY

BANKING05 Monetary Policy

Emphasis on Effective

Transmission

06 INSIGHTS

DECODING DATA08 The ë500%í Club

Companies Which Paid More

Than 500% Dividend in FYí16

10 NEWS ROUNDUP

TECHNOLOGY12 Internet of Things and 5G

Ringing in the Changes

INDUSTRY14 Personal Computers

India Shipments Grow 10.6%in Q4 CY2015

EDUTAINMENT42 Press Release

ICFAI University, HyderabadLaunches UG ProgramsProspectus

TALKING STOCK44 Zicom Electronic Security

SystemsPioneering Electronic SecurityMarket in India

COVER STORY16 Beer Baron Heralds ëBad

Timesí for BanksBut Banking Remains Robust

18 Can the Banking SectorSurvive the ëBeerí Hug?It Seems It Can

INTERNATIONALECONOMY22 Americaís Yawning Trade Gap

For Good or Bad?

48 China

Heading Towards Sunset?

PRECIOUS METALS28 Gold and Silver

End of the Bearish Phase?

MERGER STREET32 ëCementíing Growth

UltraTech Acquires JP Groupís

Cement Business

DEAL CORNER34 Healthcare IT Has Strong

First Quarter with $1.4 bn

in VC Funding: Mercom

Capital Group

CEO SPEAK36 Deepak Chandani

CEO-Worldline South Asia &

Middle East

CORPORATE FINANCE39 External Commercial

Borrowings

India Incís Overseas

Borrowings Turn Sluggish,

Poised to Touch Five-Year Low

in FYí16

OPEN NOTES55 Learnings from Tataís

Existential Crisis in UK

56 BOOKSHELF57 FACTS & FIGURESBROKEN LINES58 global warming

FINANCIAL MARKETS46 Mutual Funds

Indian Mutual Fund IndustryísAverage Assets UnderManagement Hits RecordHigh in 2015-16

DIGITAL ANALYST53 Smartphones, Smart PCs and

more...

| The Global ANALYST || April 2016 |48

I N T E R N A T I O N A L E C O N O M Y

China

Heading Towards Sunset?The recent string of several quarters of below-par growth and gloomy forecasts by a section of critics raise an

important question: Is China, the world’s second largest economy, drifting towards sunset?

– Andrew LeungInternational and Independent China Strategist, Chairman and CEO, Andrew Leung International Consultants Limited, Hong Kong

A January 2016 Goldman Sachsreport, “Walled In: China’sGreat Dilemma”, expects

China to grow between 5.8% and 6.8%and avoid a hard landing in 2016; theeconomy grew at 6.7% in the March2016 quarter, its slowest pace in sevenyears. However, its outlook for 2016-20,which spans China’s 13th Five-YearPlan, is more pessimistic. It envisagesa low probability of China achieving

6.5% growth rates while rebalancingthe economy. Moreover, it considersthat China is unlikely to escape the“middle-income trap” and will not beable to challenge US pre-eminence overthe next several decades, and possiblybeyond. In fact, according to the report,China is more likely to follow the pathof Japan, where unfavorable demo-graphics and excessive debt have led toslower growth and bouts of deflation.

The report’s prognosis is based onthe following considerations: China’sgrowth will inevitably slow to substan-tially lower rates over the next decade;The path China will follow is highly un-certain as growth slows; China will in-cur greater risks as it attempts toimplement reforms while maintainingcontrol of the financial markets andthe economy; China’s debt will continueto grow, making any eventual

| The Global ANALYST | 49| April 2016 |

deleveraging process as painful as ithas been in the US and the peripheralcountries in the Eurozone; China’s fi-nancial markets will be much morevolatile without any increase in ex-pected returns; China’s profile todayhas many parallels to Japan in 1990.The report puts forth two scenarios forthe next five years (2016-20): The LikelyPath (Base Case Scenario): China’s 6.5%minimum growth target is achieved forsay, two to three years, through rapidinvestment and increased debt. There-after, GDP growth rates declinesteadily; An Alternative Path: China’sleadership forgoes the 6.5% target and,instead, focuses on implementing re-forms and slowing the pace of creditgrowth. Both scenarios do not see thatthe target growth rate of 6.5% can bemaintained with economic restructur-ing, pointing to the possibility of Chinabeing trapped in Japanese-styled ‘lostdecades’. “Anyone who speaks with greatcertainty [about China] needs their headexamined,” the report warns.

I totally agree, as China is such avast and rapid work-in-progress. So,due account has to be taken of bothsides of the picture from different per-spectives if a more balanced view is tobe gained. While the 74-page report hasa great deal to commend itself and itsprognosis may well be spot-on, the fol-lowing perspectives need to be kept inmind.

Economic re-structuring towardshigher consumptionChina’s slowdown has resulted in agreat deal of doom and gloom aroundthe world. Much blame has been at-tached to China’s perceived economicand financial mismanagement. Pessi-mism about the 6.5% target is largelydue to insufficient domestic consump-tion in relation to capital investment.Discouragingly on the surface, con-sumption accounted for 38.3% ofChina’s GDP in 2006 and 38.2% of GDPat the end of 2015. However, this com-parison ignores the fact that China’seconomy has grown from $2.3 tn in 2005to $11.3 tn in 2015. So consumption at38.2% of a much larger economy signi-fies tremendous growth.

Indeed, according to a report of theUS Congressional Research Service ofOctober 21, 2015, the growth of Chineseprivate consumption over 2005-14 wasamong the fastest of any majoreconomy, averaging 8.9% annually com-pared with 7.3% for India and 1.8% forthe US. Evidence points to continuingsurges of private consumption evenwhen the country’s overall growth isslowing down. China is already theworld’s top market for ‘e-tailing’.China’s ‘Singles’ Day’ in November2015 splurged $9.3 bn in 12 hours onworld’s biggest online shopping day.The Goldman Sachs report also quotesimpressive sales figures of multina-tionals and local restaurants, retailoutlets and cinemas.

The economy also begins to showconvincing signs of shifting away frominvestment and industrial output. Ser-vices started to exceed the contributionfrom industrial production in 2012. TheEIU estimated that in 2015, output ofservices in China as a share of GDPwould total 49.2%, compared to 41.9%for industry, according to the Congres-sional report.

As labor and resource-intensive in-dustries are giving way to new indus-trial processes and services, a massivenumber of jobs have been shed. Thoseretrenched often end up in the small orinformal business sector in small townsand villages. As the service sector picksup, the labor market generally remainsreasonably tight. According to theGoldman Sachs report, the unemploy-ment rate remained flat, if not declin-ing, in a respectable range -between 4%and 4.4%.

Market and state-ownedenterprisesThe Third Plenum in November 2013affirmed a “decisive role of the market”.It seems to contradict the Plenum’sopening statement that ‘public owner-ship’ would remain the “main body ofChina’s economy”. While some ofChina’s giant State-Owned Enterprises(SOEs) have risen to the world’s topleague by market capitalization, theirproductivity and global competitive-ness leave a lot to be desired. As noted

in the Financial Times (November 19,2013), state-owned enterprises’ mo-nopolistic privileges will be gradually“chipped away”.

Some of these changes are beginningto be implemented. For a start, SOE’stribute to the state will be increasedfrom 15% to 30% by 2020. According toa report in the South China MorningPost, guidelines jointly issued by theParty’s Central Committee and theState Council mandated that SOEs areto have mixed public and private owner-ship. Some will be transformed intostate-owned investment companies(similar to Singapore’s Temasek). Pri-vate banks are to be introduced. Con-crete results are wanted by 2020.

According to a report of Voice ofAmerica (March 26, 2015), China re-cently launched a plan to take 112 of itsmassive SOEs and merge them into 40even bigger companies in the hope thatthey can become more competitive in-ternationally. The merger betweenstated-owned train-makers CNR andCSR Corporation is to create a new en-tity capable of challenging foreign play-ers like Siemens and Bombardier. Moreof such mergers are expected.

However, it’s true that certain pro-posals to enhance SOE governance havebeen shelved, at least for the time be-ing. Among them are the appointmentof general managers by the board in-stead of the party and the removal ofcivil service ranks and perks for state-owned enterprise executives to makecorporate profits their only concern. AsSOEs are by definition assets of thestate, it is understandable that na-tional interests cannot be entirely beprecluded from business considerationswhere strategic assets are involved.

Financial reformsChina sets its sights on ensuring theRMB plays a more influential role in

China

| The Global ANALYST || April 2016 |50

the world in future. A milestone, even ifsymbolic, was reached when it was ac-cepted as the third weighty world cur-rency in the IMF’s elite basket of Spe-cial Drawing Rights. The Chinesecurrency’s continuing ascendancy ispredicated upon the continuing openingup of China’s financial system. How-ever, recent stock market gyrations andirregularities informed the Chineseleadership that all is not well with thestate’s regulatory system. Pending thebuild-up of a more robust financial sys-tem, certain reflex actions and marketinterventions were introduced, for bet-ter or worse. It is part of China’s learn-ing curve. But these ad hoc measuresmust not be conflated with rolling backfinancial reform.

Shadow bankingAccording to a research paper (March16, 2015) of the Fung Global Institute, aHong Kong-based think tank, the over-all shadow banking asset size is stillmoderate compared with the size of thefinancial sector and GDP. At the end of2014, China’s total shadow bankingrisk assets rose to RMB 32.2 tn, or 51%of GDP, compared with a global averageof 117% of GDP.

China has an exceptionally highlevel of corporate deposit holdingequivalent to 90% of GDP, comparedwith only 7% of GDP in the US. As loansare often recycled back to the lending

bank as deposits, this enables thebanks to earn high interest spreads andacts as a cushion against anyexigencies. China’s household debt (andgearing) remains comparatively lowand does not support the contention of amassive mortgage crisis.

Hence, despite rise in credit vol-umes, China’s economy is not over-in-debted while the government possessesadequate capacity to absorb losses.There are also massive private savings,offering scope for the corporate sector toundertake debt-equity swaps. Never-theless, shadow banking has morphedinto a roundabout-way of funding localgovernment and private sector invest-ments in real assets with moral hazardimplications. China’s slower growthand adjustments in the property sectorcould escalate domestic financial risksimpacting foreign banks andinvestors. China’s shadow banking sec-tor is now closely monitored by variousregulatory authorities. Nonetheless,more systemic reform and improvedgovernance remain a critical issue.

National debtAs for debt, a look at McKinsey GlobalInstitute’s Debt-to-GDP Ratio – Coun-try Ranking in 2Q 2014 may help to putthe matter in a little perspective. At217%, China ranks 22nd out of 47 coun-tries, compared with the following coun-tries in the top 10 rankings:

1. Japan (400%)2. Ireland (390%)3. Singapore (382%)4. Portugal (358%)5. Belgium (327%)6. Netherlands (325%)7. Greece (317%)8. Spain (313%)9. Denmark (302%)10. Sweden (290%)Moreover, a significant proportion of

China’s debt is going into building in-frastructure for history’s largest andfastest urbanization, which is not yetcompleted. This scale of urbanization isessential to overcoming China’s‘middle-income trap’ and is likely tosupply the needed economic impetus.

Urbanization, hukou system, andthe consuming middle-class According to a report of the McKinseyGlobal Institute, the world’s top 600 cit-ies will account for 60% of global growthto 2025. Of 136 new cities to enter thetop 600, all will be from developingcountries, with 100, the lion’s share,coming from China. The country is un-dertaking the fastest and most exten-sive urbanization drive in human his-tory. By 2025, China will have 221 cit-ies with one million-plus inhabitants—compared with 35 cities of this size inEurope today—and 23 cities with morethan five million. By 2030, China’s ur-ban population is expected to hit theone billion mark. In 20 years, China’scities will have added 350 millionpeople, more than the entire populationof the US today.

It’s no surprise that China recentlydecided to revamp the hukou (house-hold registration) system, granting mil-lions of rural migrants their urban citi-zenship with social entitlements. Onthe cards are measures to provide themwith financial support by allowing themto lease their rural land and to assisttheir accommodation in empty urbanhousing. Many of these migrants arestill trapped in poverty. But by dint ofhard work, many are eking out a liveli-hood for themselves and their depen-dents back home. Some have made goodand become successful entrepreneurs.Given time, many will fill the lower

International Economy

| The Global ANALYST | 51| April 2016 |

ranks of China’s exploding consumingmiddle-class. According to a reportin The Telegraph (January 28, 2016),using a floor as having wealth doublethe annual medium income for theircountry, it estimates that China’smiddle-class has now grown to 109 mil-lion, larger than the US.

Moderately high growthcompatible with reform? There is little doubt that the Chineseleadership is determined to push aheadwith economic restructuring towards ahigher value-added, if slower, growth.The coming 13th Five Year Plan is likelyto incorporate the Made in China2025 strategy released by the StateCouncil on May 19, 2015. The strategyfocuses on 10 key sectors: New Informa-tion Technology; Numerically-Con-trolled Equipment; Aerospace Sys-tems; High-Tech Vessels; High-SpeedRail; Energy Conservation; New Mate-rials; Medical Devices; Agricultural Ma-chinery; and Power Generation.

On the one hand, these strategicgoals signify a technological catching-up process. On the other hand, they arepreparations for a new industrial era ashighlighted in The Fourth IndustrialRevolution, a report commissioned byIndian business and software servicesgiant Infosys and launched at the Janu-ary 2016 World Economic Forum inDavos. The investment opportunitiesas well as risks of epoch defining dis-ruptive innovations and technologies(estimated to affect five million jobsacross the globe) are likely to be huge.

China is also embarking on massivestate and private outward investmentsacross the globe. These investments arenot confined to resources, technologiesand markets for China’s goods, but ex-tend to real estate, brands, telecoms,and a host of other businesses.A report in The Economist (January 16 ,2016) on how Western enterprises arewarming to Chinese acquisitions insuch sectors as chemical businessesand the world’s largest cinema chains,speaks volumes.

This outbound trend is set to accel-erate in the context of China’s game-changing, trans-continental One Belt,

One Road (OBOR) initiative, linkingChina even more closely to Asia, theMiddle East, Eurasia and Europethrough infrastructure, trade and in-vestments. This initiative is backed bythe China-led Asian Infrastructure In-vestment Bank (AIIB) and a $40-bnSilk Road Fund.

While it is early days yet, China isalready winning contracts in buildinghigh-speed rail in a number of countriesalong the Silk Road both in Asia and inEurasia. President Xi’s first state visitto post-sanction Iran also signals thatthis global strategic initiative is forreal.

As the world’s largest trading na-tion and the major trading partner ofmany countries along the OBOR, Chinaremains central to the global supplyand production chain. This, togetherwith surging outward investments, iswell positioned to yield economic divi-dends all around, includinginfrastructural building, corporate in-vestments, expanded markets andtrade links. All these will benefitChina’s economic growth.

Indeed, according to the latest sta-tistics, China’s economic performanceis not as dire as it is portrayed to be. In2015, total import at $1.68 tn remainedthe second highest in the world, includ-ing increases in soybeans by 14.4% andcrude oil by 8.8%, a historic milestone.Outbound direct investment surged to$127.6 bn, an increase of 10%. Out-bound tourism registered 120 millionvisitor-trips, an increase of 12%, withspending overseas reaching 1 tn RMB, a20% increase.

DemographicsChina’s demographic dividend is ex-hausted as the country starts to age. Ashighlighted in the Goldman Sachs re-port, the Two-Child Policy recentlylaunched cannot arrest the aging trenduntil a couple of decades later. ButChina’s development is changing coursetowards a less labor-intensive andmore innovation driven economy. Lessrather than more labor, and qualityrather than quantity, now fit the bill. Agreat deal, of course, depends on educa-tion and the prospects for innovation.

EducationChina’s spending on education hasgrown by 20% per year since 1999. Some7 million university graduates are pro-duced every year. By 2030, China ispoised to have some 200 mn graduates,more than the entire US currentworkforce, although most may not beable to measure up to best interna-tional standards. Additionally, Chinais putting more and more resources onR & D. The country is on track to becomethe world’s top R&D spender by around2019, according to an OECD report inlate 2014.

Moreover, according to a March2015 report by ICEF Monitor, a marketintelligence resource for the interna-tional education industry, 459,800 Chi-nese students went abroad in2014, 11.1% increase over the year be-fore. 92% were self-funded. Chinese stu-dents are also returning to China topursue their careers in greater num-bers. 364,800 students returned toChina in 2014, an increase of 3.2% over2013. Since 1978, a total of 3.5 millionChinese have studied abroad. The totalreturn rate for the period from 1978 to2014 stands at 74.5%, thanks in part toan “overseas professional returneesprogram” with attractive terms. Thesehighly educated returnees are enrichingChina’s human capital.

InnovationAccording to the World IntellectualProperty Organization (WIPO), Chinahas been topping the world in the filingof patents and trademarks every yearsince 2012, responsible for a third of allpatents filed. While quantity does notequal quality, these statistics showthat China’s education is not all rotelearning. Although China still lacksNobel Laureates, world-class Chineseentrepreneurs are beginning to emergewho are defining the rules of business —Alibaba, Tencent, Xiami, to name just afew.

The environmentChina has compressed centuries of in-dustrialization into several decades, to-gether with accompanying unbridledpollution. Now the nation has woken up

China

| The Global ANALYST || April 2016 |52

to this existential threat. Hence, Chinawas taking a leading role at the recentClimate Change Paris Summit. Inher Intended Nationally DeterminedContribution (INDC) under the COP21Paris Climate Agreement, China com-mitted, by 2030, – (a) to achieve thepeaking of carbon dioxide emissionsaround 2030 and making best efforts topeak early; (b) to lower CO2 emissionsper unit of GDP (emissions intensity) by60-65% from the 2005 level; (c) to in-crease the share of non-fossil fuels inprimary energy consumption to around20%; and (d) to increase forest stock vol-ume by around 4.5 billion cubic metersover the 2005 level. A 20-billion-yuanChina South-South Climate Coopera-tion Fund will be set up to support otherdeveloping countries in combatting cli-mate change.

The share of non-fossil fuels in pri-mary energy consumption is mandatedto expand to 15% by 2020 and 20% by2030. To achieve these targets, a greendispatch system is to be implementedin favor of renewable sources in electric-ity distribution. China’s rapidly grow-ing solar and wind capacities will sup-port this system. Clean coal measures,coal caps and coal-free zones are to beintroduced while vehicle fuel qualitystandards are to be enhanced.

According to a BrookingsInstitution paper of November 2015,China aims to double wind capacity to200 gigawatts and to more than triplesolar capacity to 100 gigawatts by 2020

from 2014 levels. This expansion is sup-ported by the dramatic momentum ofgrowth of non-fossil generation capacityover 2010-2014. Solar capacity hasjumped by 3,161.6% to 28.05 gigawatts,wind capacity by 225.8% to 96.37 giga-watts, nuclear by 83.7% to 19.88 giga-watts, biomass by 72.4% to 9.48 giga-watts, hydro by 39.7% to 301.83 giga-watts, and geothermal by 7.1% to 0.03gigawatts. Overall, the increase hasbeen 73.3% to 455.64 gigawatts in justfour years. Half of China’s energy usetoday is subject to mandatory efficiencystandards. With a ‘national emissionstrading’ scheme expected in 2017, theChinese economy is on the way towardsbecoming 85% less energy-intensive,compared to the past 25 years. Withlarge-scale deployment of wind, solar,hydro and nuclear power, China’s CO2

emission growth is expected to flattenand then peak around 2030.

‘Walled in’? Not just yetArguing that China would inevitablyfollow the path of Japan’s ‘lost decades’,the Goldman Sachs report concedesthat China has three advantages com-pared to Japan in the 1990s. First,while China’s debt-to-GDP is very high,it is still lower than Japan’s in 1990.Second, while China’s Total Factor Pro-ductivity (TFP) growth rate hasdropped from its recent peak of 4%, itremains more than double that of Ja-pan in 1990. Finally, China has a record

of implementing significant reforms inthe face of almost impossible odds.

China’s reform efforts since thecountry opened up in 1978 have neverbeen smooth. Few would doubt the scaleof challenges in lifting over 600 mnpeople out of abject poverty in 37 yearsin a country not noted for abundance ofnatural resources. Dilemmas are plentyto be found. Take, for example, DengXiaoping’s decision “to let the few get richfirst”. Or, a strategy to favor cities inpreference to the countryside, or goingfor labor-and-energy-intensive includ-ing polluting industries outsourcedfrom the West, or opening up thecountry’s economy to gain entry into theWorld Trade Organization (WTO). Asimilar dilemma now applies to switch-ing to slower but more innovative andsustainable growth. Regardless of whatseemed impossible odds, successiveFive-Year Plans were formulated anddelivered, not without difficulties andtwists and turns. But warts and all, theresults are there for all to see.

As the country of over 1.377 bnpeople is undergoing seismic changes,there is a great deal of pain and trialand error. These have global repercus-sions as China is firmly embedded inthe world economy. But this doesn’tmean that China is necessarily more‘walled in’ compared with what she hasexperienced before. What is more, thisdoesn’t mean that China’s leadershipwill roll back reform. Indeed, as evidentabove, the pangs of a ‘New Normal’ ofslower growth belie a new China strug-gling to be born. China’s new reformagenda will become clear in the soon-to-be-unveiled 13th Five Year Plan (2016-20).

Do I want to bet against China’schances of fulfilling the targets in thecoming Five Year Plan? Because thistime is different as China is between arock and a hard place? While I would notvouchsafe for the certainty of success,looking at broken crystal balls bettingon “China’s coming collapse” during thepast 15 years, I am hesitant to say thatfor now, the only path for China is walk-ing hamstrung towards sunset. �

International Economy

Reference # 20M-2016-04-18-01