#Fincabulary 29 – Guerrilla Trading

Meaning –  A very short-term trading technique that aims to generate small profits while taking on very little risk per trade and repeating this multiple times in a trading session. Guerrilla trades typically have a shorter duration than scalping or day trades and seldom last for more than a few minutes, at the most. Because of its high trading volume and limited return nature, low commissions and tight trading spreads are prerequisites for successful guerrilla trading.

While guerrilla trading can be applied to any financial market, it is particularly well suited for trading foreign exchange. This is because the major currency pairs typically have very tight trading spreads because of their plentiful liquidity that is virtually available around the clock.

But these elevated levels of leverage – which may be as much as 50 times the trader’s capital – represent a high-risk, high-reward scenario that can wipe out an inexperienced guerrilla trader in a few trading sessions.

 

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

Abenomics: Has it really worked for Japan?

By Keerthana Raghavan

Abenomics refers to a set of policies adopted by the Japan Prime Minister Shinzo Abe when he was selected as Prime Minister for the second time in 2012. The policies were implemented in the background of near zero growth rate for past 20 years and huge government debt. The policies were aimed to fight deflation by encouraging private investments and consumer spending.

The Three “Arrows” of Abenomics:

  1. Monetary Stimulus: Monetary stimulus like quantitative easing (when the Central Bank buys bonds from people to lower rates and increase money supply in the economy which would trigger spending) was undertaken. In 2013, the Bank of Japan purchased bonds to reach its inflation target of 2%. The rates are currently negative (-0.1%) in Japan which means the banks need to pay interest to the Central Bank for keeping excess reserves. The whole point is to increase lending and prevent people from saving and also to break the chain of deflation and low spending.
  1. Fiscal Stimulus: Relates to government spending in three main areas ranging from welfare of the people to the infrastructure. The government is trying to create a good environment for business with big building projects. The focus on infrastructure relates to building schools, roads etc. and buildings for the upcoming Tokyo Olympics in 2020. Other measures include fulfilling of its debt obligation which is very high.
  1. Structural Reforms- Policies targeted towards long-term growth focusing on the productivity of its labour force, improving the ease of doing business, deregulation of various industries, increasing inbound tourism etc. productivity of labour force is vital since the demographics of Japan are skewed more towards the older population.

In spite of all these reforms in 4 years nothing much has changed. The GDP growth is still flat this quarter and capex has declined 0.4%. The prime minister has also delayed the hike in consumption tax to 10% to 2019 for the worry of consumer spending taking a hit.

 Why has Abenomics failed?

The major problem in Japan has been a chronic lack of demand for goods. The problem is rooted in the demography. The growth is possible only if there is a major technological growth driver that can revive the economy or if there is huge immigration to balance out the ageing population and shrinking workforce. The fiscal stimulus cannot keep continuing since the budget of Japan is already constrained. The need of the hour is to accept the fact that Abenomics has failed and look for reforms that may boost the economy.

WHAT DOES CHINESE SLOWDOWN MEAN FOR INDIA?

By Priyanka Modi

Edited by Sachit Modi

Executive Summary

The purpose of this paper is to analyze the impact of the slowdown in the economic growth of China on India. I will analyze the repercussions of Chinese economic crisis on the global economy. India being well-integrated with the global economy cannot be alienated from the effects of the slowdown. I will discuss both the benefits and the negative implications for the Indian economy. In the midst of this crisis, there is also an opportunity for India. I will consider the steps that can be taken by the Indian government to reduce the degree of the negative impacts of the weakening Chinese economy and leverage the opportunities at hand.

Ever since the economic growth of China, India’s largest trading partner in goods started slowing down, concerns have been raised over its possible impact on the Indian economy. The steep fall in value of the Chinese currency, Yuan, in recent times has once again emboldened the naysayers. While it will be erroneous to argue that India will not be impacted by the economic churning happening in China, it will be equally irresponsible to suggest that India will be completely doomed if China falters. In value terms, China accounts for approximately one-tenth of India’s merchandise trade, and bulk of it comes from imports of goods to India. India’s trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India’s exports to China came in at $9.68 billion while imports stood at $61.54 billion. With respect to 12 major product groups largely manufactured by MSMEs, imports from China grew at a higher rate than respective imports from all other countries combined during the period negative impact of a Chinese slowdown as trade flows slow down. At the same time, it should also explore the positive side and leverage the opportunities it has.

Implications of Chinese slowdown on the Global Economy

China used to have the fastest growing economy with growth rates averaging 10% over the past 30 years, according to the International Monetary Fund. They account for close to half of the global consumption of copper, aluminium and steel, and more than 10% of the crude oil. China has driven global growth, which has averaged a paltry 3% a year since 2008. So, the Chinese economy slowdown would impact different regions of the world in different ways depending on their exposure. In countries like Australia, Brazil, Canada and Indonesia, which are dependent on the commodity exports, the slowdown could have a negative impact on their GDP. However, the inevitable fall in the commodity prices could be beneficial for the countries that consume the commodities, such as the United States. Either way, the slowdown will require some adjustment on the part of the global economy. As per IMF, the country was the single largest contributor to the global economic growth, contributing 31% on average between 2010 and 2014. In this scenario, slower Chinese GDP growth would definitely have global repercussions. A fall in exports to China will impact countries such as South Korea, Japan, Brazil and Australia as exports to China are ~20-30% of total exports for these countries. India too won’t be spared as the overall global growth falters.

Positive Impact on India

Lower commodity prices: The first and an overwhelmingly positive impact of a slowdown in China’s commodities demand on India would be through lower commodity prices. India imported $139 billion worth crude and petroleum products in the FY 2015, and as a rough rule of thumb, every $1 drop in crude prices results in a $1 billion drop in the country’s oil import bill.

Attract foreign capital: Though India cannot do much about the currency, the rupee is expected to remain strong as oil prices tumble and markets remain flush with foreign money. While the impact of China is negative for exports, it may provide a good opportunity for Indian debt and equity markets. The Chinese devaluation has scared foreign investors who may flock to India to look for better returns. A depreciated currency shrinks the dollar value of investments at the time of repatriation. Given that other large emerging markets such as Brazil, Russia and South Africa are going through their own economic issues, India currently is the best-placed country among the top developing nations to attract these flocking investors.

Lower cost of infrastructure: China is the world’s largest copper consumer, accounting for 40% of the global consumption. The Chinese slowdown has resulted in the fall in prices of the hard commodities, especially copper and aluminum. These commodities constitute the largest portion of the infrastructure bills. Thus, the fall in prices could be beneficial for India, whose major focus at this time is building a strong infrastructure network for the country. This fall would help India to reduce the cost of constructing new infrastructure and would act as a supporting element to initiatives such as the Smart City Mission.

Control deficit and inflation: Oil prices were already tumbling down because of the global slowdown and the possible US-Iran deal. The Chinese economic slowdown further plummeted the prices. Low oil prices help India to control its deficit and keeps inflation under check.

Higher profits for Indian corporates: Over the past few years, due to the depressed domestic demand, many of the Indian corporates had been struggling with their pricing power and were unable to pass on the increased cost to the end consumer. Cheap global crude and commodity prices mean lower input costs, translating into higher profit margins for them. This will act as a major respite for them.

Negative Impact on India

India’s export growth: India’s exporters will lose out on currency competitiveness in the segments where it competes directly with China, particularly textiles, apparels, chemicals and project exports. If the Chinese demand slows down, its raw material requirement will go down, and India’s exports to that country may decrease to such an extent that it may not be able to take advantage of the Yuan devaluation to earn more dollars. The fact that India’s exports to China declined 19.5 percent to $11.9 billion in 2014-15 from $14.8 billion a year ago illustrates this. India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15. Thus, there is a chance that India may lose out in the race.

Indian metal producers: China accounts for nearly half of the world’s steel production and as construction and investment slows down, the decline in demand for commodities will hurt the Indian metal producers. Steel companies and Aluminium manufacturers may start facing losses. Hindalco and Balco, for instance, are increasingly relying on costlier captive coal. Steel manufacturers like JSW Steel and Tata Steel were forced to lower their prices and face the fear of dumping from across the border. Also, companies like Tata Steel and SAIL, which have their own mines, will suffer the most as they will not be able to benefit from the lower iron ore and coal prices. Metal producers like JSW, who buy coal and iron ore from the open market, would be the least affected.

Tyre industry: As demand slows down in their home market, Chinese tyre makers might start exporting tyres at very competitive rates to the rest of the world. A Chinese tyre is around 30-40 per cent cheaper as compared to the domestic prices. Thus, the commercial vehicle tyre segment will be negatively impacted as most of the consumers are more concerned about the value rather than the brand.

Automobile industry: China had the potential of becoming the fastest growing market for the automobile exporters and manufacturers. As the demand in their market goes down, companies like JLR, who were investing in that market, will have to look for alternate options.

How should India react?

India’s GDP has expanded by 7.3 percent in the last quarter of 2015 whereas China’s GDP slipped to 6.8 percent in the same period. India will be the fastest-growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global growth is facing increasing downside risks, as per the World Economic Outlook released by the IMF in April 2016.

Since we are already growing, now is the right time to leverage the Chinese slowdown to our advantage. India can surely benefit from the opportunities it has by focusing on the following-

Make in India: With the government of India giving a lot of weight to the ‘Make in India’ campaign, this may be the time to provide impetus to manufacturing and invite Chinese companies to set up a manufacturing base in India.

Growth center to invest: A slowdown in the Chinese economy would also mean that the global finance and capital market would look for new growth centers to invest in. The government should invest in infrastructure like roads, railways etc. and introduce reforms to improve business conditions in India. By providing an attractive alternative to China, India can have a much bigger pie of the global capital, which in any case it needs to fund its huge infrastructure capital requirement.

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Stem the rupee’s fall: A bigger concern that arises from the Chinese devaluation is for the Reserve Bank. RBI governor, Raghuram Rajan, who had been giving warning against the “beggar thy neighbor” policies, may have to alter rate decisions in order to keep up with the global environment. The Reserve Bank of India could sell dollars in the market to increase the rupee’s value. There are several other measures possible that range from floating a sovereign bond to raise money from NRIs to making the import of luxury goods costlier by imposing duties on them.

Anti-dumping duty: The steel industry and the government, both are worried over dumping from China. So far, there have been 322 anti-dumping cases in 2015, of which 177 cases involve China. The Finance Ministry has imposed antidumping duties on the import of hot-rolled stainless steel (HR SS) flats of grade 304 originating from China, Malaysia and South Korea. The anti-dumping duties will be effective for a period of five years starting 2015. India consumes about 1 million ton of this type of stainless steel and more than 40 percent of that is imported, mainly from China. The anti-dumping duty can also be extended to the 200 grade stainless steel as it commands a market share of more than 50 percent in India.

Conclusion

The impact of China’s slowdown on India would depend on many factors such as lower input prices, intensity of competition from cheaper imports and the pace of global growth. The speed at which we go ahead with the reforms is very important. It is not a matter of global economy slowing down, but how India speeds up its reforms. India will have to come to grips with the fact that in an integrated world, much is beyond its control and it needs to focus on the things it can change – boosting investments and generating jobs.

References

http://www.crisil.com/pdf/research/CRISIL-Research-Opinion-China-Slow-
down-16Jul2015.pdf. (n.d.). Retrieved April, 2016, from http://www.crisil.com/pdf/research/CRISIL-Research-Opinion-China-Slowdown-16Jul2015.pdf

•How China’s Slowdown Is Having Ripple Effects All Over The World. (n.d.).
Retrieved May 17, 2016, from http://www.businessinsider.in/How-Chinas-Slowdown-Is-Having-Ripple-Effects-All-Over-The-World/articleshow/29918501.cms

•China economy slowdown: India should focus on mitigating impact. (2016,
January 11). Retrieved April 20, 2016, from http://www.hindustantimes.com/editorials/
china-economy-slowdown-india-should-focus-on-mitigating-impact/story vMRWd6CcBdkVFTr0whrGkL.html

•India imposes anti-dumping duty on some steel from China. (n.d.). Retrieved
April 22, 2016, from http://www.moneycontrol.com/news/current-affairs/india-imposes-anti-dumping-dutysome-steelchina_1401378.html

•How the Chinese Yuan devaluation will impact India? Read more at: Http://
http://www.vccircle.com/news/economy/2015/08/11/how-chinese-yuan-devaluation-will-
impact-india. (2015, August 11). Retrieved April 22, 2016, from http://www.vccircle.com/news/economy/2015/08/11/how-chinese-yuan-devaluation-will-impact-india

•Steel producers to benefit from import curb: India Rating. (2015, June 22). Retrieved April 23, 2016, from http://www.dnaindia.com/money/report-steel-produc-
ers-to-benefit-from-import-curb-india-rating-2097936

•The impact of a China slowdown. (2014, November 29). Retrieved from http://www.economist.com/news/economic-and-financial-indicators/21635039-impact-china-slowdown

• India Could Edge Out China From Top Growth Spot in 2016. (2016, January 13). Retrieved April, 2016, from http://www.bloomberg.com/news/articles/2016-01-
12/india-seen-edging-out-china-from-top-growth-spot-in-2016#media-4

•India’s trade deficit with China swells to $51.9 billion in 2015. (2016, March
14). Retrieved April, 2016, from http://articles.economictimes.indiatimes.com/2016-03-14/news/71509794_1_trade-deficit-trade-imbalance-chinese-exports


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About the author:

She is a PGDM finance student of batch 2015-17 at TAPMI. Her area of interest includes economic research and risk management. You can contact her at priyankam.17@tapmi.edu.in