Roach Sees China Better Placed Than India to Withstand Slowdown

January 12, 2012, 1:33 AM EST By Michael Heath

Jan. 12 (Bloomberg) -- China has scope to loosen fiscal and monetary policy, making it better placed than India to weather a global economic slowdown, said Stephen Roach, non-executive chairman of Morgan Stanley Asia.

China is bringing inflation under control and has a small budget deficit, Roach said in an interview today with Bloomberg Television. In contrast, India has a currency under pressure, an “inflation problem” and a large fiscal shortfall, he said.

India’s “got its hands tied: It can’t cut interest rates because of the inflation and currency issues, and it’s got no leeway to increase its budget deficit,” Roach said. “India is in a much tougher place right now than China in the midst of this weaker global economy.”

Roach’s views differ from those yesterday of Nouriel Roubini, the co-founder and chairman of Roubini Global Economics LLC who called China’s growth model “challenged” and said India is “positioned well.” The two developing economies account for more than a third of the world’s population.

The International Monetary Fund is preparing a “substantial” cut to global economic projections that in September showed China and India leading the world’s recovery this year.

Prime Minister Manmohan Singh’s efforts to bolster the Indian economy have been hampered by corruption scandals, inflation and the decision last month to stall the easing of foreign investment rules in multibrand retail.

Indian Inflation

Indian central bank Deputy Governor Subir Gokarn said last week the Reserve Bank is “very concerned” about the impact on inflation from the rupee, Asia’s worst-performing currency in the past year after sliding 13 percent.

Roubini said yesterday that China’s growth model “is now challenged” because the U.S. can no longer be the consumer of first and last resort. “Unless China changes its growth model there’s even a risk of a hard landing in the next couple of years,” he said

“In relative terms, India is actually positioned well,” Roubini said in an interview with Bloomberg UTV in New Delhi. At the same time, the pace of “structural reforms” in India has been “mediocre” and unless India pushes ahead with those changes, economic growth in “absolute terms” will “disappoint,” he said.

India’s economy expanded 6.9 percent in the third quarter of 2011 and the Reserve Bank paused rates last month after a record 13 increases since mid-March 2010, as the benchmark gauge of inflation dropped to a one-year low of 9.11 percent in November.

China’s Growth

Roach said today that China is “very serious about engineering a shift” from an investment- and export-led economy to consumer-driven growth.

“You’ll be pleasantly surprised at the progress they make in building out a consumer-led growth model,” he said. “I’m of the view that we can look for positive surprises from China not negative surprises.”

The IMF is scheduled to release revised global projections on Jan. 24. Olivier Blanchard, the Washington-based fund’s chief economist, said in a Bloomberg Television interview last week that with European growth “very close to zero at this point,” there would be a “substantial” cut to the most recent 2012 global expansion estimate of 4 percent.

--With assistance from Susan Li in Hong Kong. Editor: Brendan Murray, Sunil Jagtiani

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net

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Japan Set to Unveil India Currency Swap Deal During Noda Visit

December 27, 2011, 3:03 AM EST By Kyoko Shimodoi and Unni Krishnan

(Updates with comment from economist in fourth paragraph.)

Dec. 27 (Bloomberg) -- Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week.

Finance Minister Jun Azumi told reporters today in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that starts today, with the amount of the swap line about $10 billion, a Japanese government official said on condition of anonymity.

Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh’s administration contends with a slump in the rupee that risks stoking inflation.

“It’s like an insurance cover or padding to the foreign- exchange reserves in a crisis,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s. “It will help in times of dollar shortage.”

The rupee has plunged about 15 percent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe’s protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among so-called BRIC nations, with the benchmark wholesale-price index rising more than 9 percent in each of the past 12 months.

Previous Arrangement

While India’s foreign-exchange reserves have risen $4.8 billion in the past year to $302 billion, the country’s holdings are smaller than those of China, Japan, Taiwan, South Korea and Hong Kong.

India and Japan have previously supported each other with similar arrangements. In 2007, the two nations agreed to support each other in the event of a run on their currencies in the first such foreign-exchange accord for the South Asian nation. Under the plan, Japan would lend dollars and other currencies should India find its foreign-exchange reserves insufficient to stem a fall in the rupee.

Japan has also deployed some of its reserves, the world’s second biggest behind China’s, for aiding Japanese companies in making overseas acquisitions.

Direct Trading

Earlier this week, the Japanese government said Asia’s two largest economies will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing Dec. 25. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the two governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.

--With assistance from Lily Nonomiya in Tokyo. Editors: Chris Anstey, Stephanie Phang

To contact the reporters on this story: Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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How HDFC Bank Is Triumphing in India

By Ruth David and George Smith Alexander

Illustration by Kelsey Dake

Aditya Puri avoids e-mail, doesn’t carry a mobile phone or wear a watch, and goes home for lunch most days. That hasn’t stopped his HDFC Bank from becoming the country’s second-biggest lender by market value, after government-owned State Bank of India. “Banking is a simple business,” says Puri, 61, in an interview in his sparsely decorated office at the bank’s Mumbai headquarters, sunlight streaming onto the bare tiled floors. “You be too aggressive, it will come back and bite you on your backside.”

Led by Puri, who holds the title of managing director, the bank has posted profit increases of at least 30 percent in each of the past 10 years. Puri built the credit-card and consumer lending businesses into India’s largest while steering clear of losses incurred by rivals such as ICICI Bank, also based in Mumbai, and Citigroup, India’s biggest foreign bank by assets. Now he is expanding in investment banking, and wants to be among the top two or three players advising on mergers and acquisitions, project finance, and debt sales within three years.

With 3.15 trillion rupees in assets ($61.8 billion), the bank has been adding almost 2 million customers a year, according to Puri, and has more than doubled lending to consumers since 2008. Puri, who keeps an autographed copy of Michael Lewis’s The Big Short in his office, has a reputation for prudence. HDFC Bank’s bad-loan ratio was 0.2 percent in the quarter ended in September, a fourth of ICICI Bank’s and one-tenth that of State Bank. “The biggest quality of HDFC Bank is its ability to control itself,” says Samir Arora, founder of Helios Capital Management, a Singapore-based hedge fund whose top holding is HDFC. The bank “doesn’t feel left behind in the good times because it does so much better in the bad times.”

A graduate of Punjab University and a chartered accountant, Puri worked at Citigroup for almost 20 years, rising to chief executive officer of Citibank Malaysia. He joined HDFC Bank as managing director when it was founded in 1994. The bank was launched by Housing Development Finance Corp., India’s biggest private mortgage lender, which remains its largest shareholder, with more than 23 percent, and sells about a quarter of its mortgages through the bank.

A delegator who usually leaves the office at 5:30 p.m., Puri says he reads about 50 reports a day from senior managers. In February 2008, on a weekend when HDFC Bank was in talks to acquire Centurion Bank of Punjab, Puri was relaxing at his farmhouse on the outskirts of Mumbai while his top brass was putting the finishing touches on India’s largest banking deal. “I have a very competent management team,” says Puri. “We agree on what needs to be done, and they do it, and they only call me if there’s a problem.” If they call after hours, they’d “better be very, very sure” it is something crucial, he says.

The next few years may test Puri’s laid-back style. Higher borrowing costs and a slowdown in economic growth as India’s central bank ratchets up rates to curb inflation could lead to an increase in bad loans. And HDFC Bank may face more competition in consumer lending: After a seven-year hiatus, India’s central bank may issue new banking licenses. Meanwhile, Standard Chartered, HSBC, and Citigroup, the foreign banks with the biggest presence in India, continue to add branches as they target middle- and high-income consumers.

Even so, foreign banks have a combined market share of only 4.9 percent of lending and 4.4 percent of deposits, according to data from the Reserve Bank of India. HSBC, the second-largest foreign bank in India by number of branches, has had more than five years of losses in its local retail-lending business in the country and is now operating at “virtually break-even,” HSBC’s India CEO Stuart Davis said in August. Puri says he’s not worried about competition from any new banks the government may allow. “Will they make a difference to the banking landscape for the next 10 years with new bank licenses? The answer is no,” he says. “First they have to get a license. Then they have to set up basic infrastructure. Then they have to start the business. Then they have to decide which business they’re going to grow in. Then they have to spend the money to grow in that business.” Investors including Helios Capital’s Arora say even existing banks aren’t much of a threat. “There’s no competition from any of the private-sector banks,” Arora says.

As for global ambitions, Puri says he doesn’t have any. After opening branches in Bahrain and Hong Kong to serve Indians working abroad and companies in need of trade financing, he doesn’t intend to expand further. He says he doesn’t want to take on so much risk that the depositors whose money he’s using won’t be able to sleep at night. “If you go international today, you’re the one taking higher risks,” he says. “To try and become a major bank is very difficult with the new regulations. You’re getting a lower return, and you have a much better market here, so why would we go?”

The bottom line: A focus on consumer banking and careful lending has helped Puri build HDFC Bank into India’s No. 2 lender by market value.

David is a reporter for Bloomberg News. Alexander is a reporter for Bloomberg News.

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