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    ​Ritesh Jain’s what I read this week: Dollar has a threat; Indian savings@five-year high

    Synopsis

    SDR notes will help avoid forex and interest risks stemming from assets denominated in a single currency. It will diversify asset allocation for investors.

    ET Online
    By Ritesh Jain

    Hey there!

    Image article boday
    I would like to see the World Bank move to sell SDR bonds in China as a defining moment of the week, and how! It has wider ramifications which we are going to see in the days to come.

    If that doesn’t excite you much, I also read about the technology that is likely to have the biggest impact on our lives in the next few decades. And it’s not social media, not artificial intelligence, not big data or robotics. Keep guessing till you get there.

    Enjoy reading and happy weekend!

    Challenging dollar dominance
    The World Bank sold its first batch of Special Drawing Right (SDR) bonds in China at a yield (0.49 per cent) well below those for similar Chinese bonds, highlighting Beijing's challenge in getting global recognition for its yuan currency and SDR assets.

    The SDR is a synthetic reserve currency administered by the IMF, whose value is determined by a basket of other major world currencies. What this could set off is reduced dominance of the dollar as the only viable solution to foreign currency-denominated debt issuances. It could trigger a string of increased currency basket weighted issues bringing vibrancy to the market.

    SDR notes will help avoid foreign exchange and interest risk stemming from assets denominated in a single currency (read: the dollar), and will diversify asset allocation for domestic and international investors. The yuan has fallen 4.5 per cent in the past 12 months, increasing appetite among Chinese investors for diversification.

    The issue, the first SDR bond in more than three decades, is being closely watched by investors as it's part of a wider push in China to increase the net supply of such bonds, and comes as Beijing hosts the G20 summit in Hangzhou.

    Analysts say China will be keen to foster interest in the SDR debt programme as it steps up efforts to internationalise the Chinese yuan, and further liberalise its capital markets.

    One argument is that the SDR bond may provide Chinese investors an opportunity to diversify their portfolios since Beijing's control on capital outflows in the past year has made it difficult to buy overseas assets. While it is too early to assess how big this could become, a key takeaway is that we are seeing more internationalization of currency and could pave way for Chinese investors to access foreign currencies in the domestic bond market – helped by the inclusion of the Yuan in the SDR basket in October. Let us say it’s a good start as of now.

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    Indian knitwear town gunning to fisplace China
    India has lagged behind in apparel exports having lost market share to Bangladesh, China and even Vietnam. The trouble is that other Asian nations are way ahead. India’s $17 billion exports of apparel were about half as much as Bangladesh’s last year and its 3.7 per cent global market share lagged behind Vietnam’s 5.1 per cent. Closing the gap is crucial: Apparel is a labor-intensive industry, which has historically helped developing economies transition out of agriculture.

    A key weakness of the sector is worker productivity, which is almost three times lower than in China. That’s in part because Indian apparel manufacturers tend to be unregistered and smaller than in competing countries, limiting the use of modern production technologies and the capacity to take on large orders.

    The other problem is labour shortage – as strange as it sounds for a country of more than 1.2 billion population. Besides, 78 per cent of Indian companies employ less than 50 workers; the corresponding number for China being 15 per cent. That also means a lot of them remain below the threshold of government taxes and regulation, known by economists as the ‘informal’ economy. Then there are labor cost advantages Bangladesh enjoys (30 per cent lower labour cost) and favourable tax terms with the EU – Bangladeshi garment exporters do not pay duties to the EU.

    But all is not lost for the sector - Tirupur exporters have also joined forces to lower costs by educating companies on ‘lean’ production management techniques and training factory staff to raise output. The government is partly funding the programs.

    India needs to start climbing the ladder fast to take advantage of its young population. Automation is making the ladder shorter and shorter over time.

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    Household savings at five-year high
    Household savings invested in financial assets has struggled to grow in line with physical savings in India albeit some uptick in the last two years. However, the clampdown on black money which in-turn has adversely affected the real estate sector the most, has brought around a change in this trend.
    Household financial savings of the country in 2015-2016 were the highest in five years. They stood at 7.7 per cent of the gross national disposable income.
    The household financial savings comprise of currency, deposits, shares and debentures, insurance funds, pension and provident funds and something referred to as claims on government (post office savings scheme).

    The simple reason is that the rate of inflation has been lower in 2015-2016 than it was in the earlier years. When inflation goes down, people have a chance of saving a greater proportion of their income. Substantial credit for this can be given to the current government for clamping down on black money and keeping food inflation under control by keeping MSPs on the lower side.

    On the other hand, departing RBI governor has advocated positive real rates, something that was missing in the previous governor’s tenure for most of his period. Positive real rates incentivize households to save in financial assets.

    Interestingly, we observe shifting of savings away from deposits with real rates remaining large negative during the 2011-13 period. This entails an illusion where you do get a promised return on your deposits but loose purchasing power at the same time.

    This led to a gradual move out of deposits over time. With inflation cooling down to 5-6 per cent from 10-11 per cent and interest rates on bank deposits higher than CPI, depositors are now making a real return which clearly wasn’t the case earlier.

    One more interesting observation is that the spread between household gross financial savings and net financial savings has shrunk. The reason? Higher leverage by households than in the past. This is one sector which is still borrowing and spending.

    READ MORE:

    How the blockchain is changing business
    The technology likely to have the greatest impact in the next few decades has arrived – it’s not social media, it is not artificial intelligence, big data or robotics. It is the underlying technology of digital currency like bitcoin. We are talking about blockchain technology.

    Today when we send an email/ppt presentation etc – we do not send the original document – we send a copy. But this cannot be applied to money transfers, loyalty points, intellectual property (IP) etc. When I remit $100, I should not end up having it still with me! Cannot send a copy mate. There we have the intermediaries – the banks for example. But it’s a costly affair in terms of fees and commissions. So how about an internet of things in addition to the internet of data where every kind of asset, money, music could be transferred (not replicated)?

    Blockchain technology is widely used in Bitcoin currency which is a crypto currency and doesn’t rely on any intermediary. We are talking about peer to peer exchange without intermediaries.

    We are relying on cryptography – this builds up the trust protocol. A bitcoin hack would require de-crypting thousands of data blocks stored in millions of computers world-wide using very sophisticated hacking abilities as compared to the central repository of data in banks and other intermediaries. It’s decentralized and it keeps the intermediaries out. Sure it will lead to loss of thousands of jobs but that’s a different discussion for a different day.

    The beauty of blockchain technology is that payment and settlement are not two separate transactions – it’s just a change in ledger balances. Blockchain could have many uses –

    · Putting land records on blockchain, And once again almost impossible to hack

    · Distributed application on a blockchain for the sharing economy (think Airbnb, Uber etc)

    · Reducing the cost of remitting money – big opportunity for prosperity

    · Data – the most powerful asset in this digital age. Protecting and monetizing data

    · Protecting IP rights – putting content (music, art, songs etc) on a blockchain

    We are talking about a big sharing economy owned by not an institution but a collection of billions of ledger balances. A migrant worker in Alberta, Canada sends her monthly share of remittance to her mom in Manila, Philippines – the intermediary – Western Union almost pockets 10% of the proceeds. What if this transaction was reduced to a mere change in ledger balances? Think about the possibilities.

    Financial intermediaries have two choices – fight their turf or adopt blockchain. I guess this won’t be a difficult choice. Either adopt it or become uncompetitive and ultimately redundant. The writing is on the wall.

    READ MORE

    (Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)





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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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