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Over the last few weeks the political and economic turmoil that is unfolding in China is creating quit a stir. While many books and articles have predicted an impending political and economic crisis in China, the recent events are only reinforcing this view.

Probably most of the doomsday predictions may never come true. It is in the interest of nobody that the world’s second largest economy is heading to a roadblock.

The dilemma here is that structural changes needed in the economy will have a significant impact on the social and political system in China. The Chinese Communist Party is simply not ready for any such upheaval.

1. China’s State Owned Enterprises (SOEs) are crowding out private investments. They get preferential access to household savings from state owned banks at low interest rates. The result is inefficiency, stymied innovation and low return per unit of capital invested. To make matters worse SOEs are headed by powerful princelings who are members of Chinese Communist Party and no one can touch them.

2. For long, the Chinese economy is dependent upon its exports and infrastructure to boost the growth rate. Both these factors contribute more than 80% of growth in the economy – something not seen in any large economy in the world. The furious rate at which infrastructure is built up has reached saturation point with negligible economic return from future spending. Exports have taken a hit as well with the troubles in Euro and US

3. China’s efforts to boost domestic consumption for economic growth are not helping much either. Anticipating higher inflation and no social security net to bank upon, Chinese are simply hoarding whatever savings they could. Unfortunately the households have no where to go but park their money in the banks at negative real interest rates.

4. It is suspected that the reckless spending in building unproductive assets is wrecking the Chinese banking system. There are chances of a bubble in the banking systems that can burst any time and make the central bank prop up the balance sheets with huge cost to the tax payers.

No one has a silver bullet to resolve all the issues and nobody in the party wants to rock the boat in the middle of once-in-a-decade political transition. China’s problems are more social or political in nature which makes them even harder to resolve. Let us hope for the best.

Interesting comparison of Indian states and territories with countries by GDP and Population. Economist notes the the extent of progress that still need to be made by India to become a mid-income country.

NYTimes.com has a nice interactive chart to evaluate if renting or buying a home is better option. Although the chart is for $ investments it wont matter what currency you use.

It seems that finally India grew faster than China in 2010.Surprisingly it happened without much fanfare. The reasons for this anomaly are even curious to read. Unlike most major economies that calculate GDP by expenditure method, India calculates its GDP by Factor Cost method. That means India adds up the income earned to arrive at GDP where as other major economies do so by adding expenditure.

Although both methods should lead to the same figure, taxes and subsidies get in the way. Once these adjustments are made India grew by 10.4% in 2010; China by 10.3%!

SuperFreakonomics is a thought provoking sequel to Freaknomics. This book takes forward the core theme from the first book – People respond to incentives in myriad ways. Unlike other books on economics, SuperFreakonomics has no big concepts or frameworks. It does not conform strictly to a book on macro or micro economics.

Instead, the book – backed by empirical data – argues;  how hard economics drive prostitution, how seemingly innocuous TV shows had impact on the crime in America, why terrorists should buy life insurance, how much good do car seats do, why the simple solutions to global warming are being ignored and finally why most of us really are not that altruistic when donating. The book drives you think critically and explore the hidden side of simple life events. I will argue that it is a book for psychologists and not economists.

Perhaps none of the themes catch the attention of a mainstream economist. But we face most of the themes in our daily lives and the book will make us see these life events differently. That is what makes this an interesting read. For those who enjoyed Freakonomics (as I had), this will be a must read. Read reviews on Amazon.

A good article in Livemint about how the switch over to IFRS will impact Indian firms.

IFRS is going to have significant impact on the financial statements of Indian companies following Indian GAAP standards.

IFRS mandates different accounting norms compared to Indian GAAP for recognizing Business combinations, Special Purpose Verhicles, FCCBs, ESOPs and Derivatives. Most of them will have P&L charge that is not currently required by Indian GAAP standards. This will result in lower profits for most listed entities.

However there is no material impact on the companies with the new accounting standards and so it is expected to have limited impact on the stock prices.

A new book, Red Capitalism, takes a critical look at the China’s financial system. In late 70′s China virtually had no banks. For the next 3 decades, the senior leadership in China meticulously built a formal financial system.

But concerns still remain. Beyond the facade, the book explains, lies a primitive banking system that deals in arcane and secretive transactions with the state entities. So much so that, it is hard to rely upon any data about Chinese banking system.

In comparison, India seems to have done a much better job, with efficient price discovery, strong regulatory regime and higher transparency.

A scathing article in Economist, Graft in India: Rotten to the crore, sums up the corruption malaise in India. As the economy grows and the income inequalities rise, corruption problem is only getting worse. It is however now new for us except that the issue is grabbing more headlines these days.

India’s Microcredit Sector is facing a collapse with the rural poor-encouraged by local politicians-stopped paying the loans. If the industry indeed collapses, it will be a blow to the mission to alleviate rural poverty. Access to capital is scarce in rural India as banks refuse credit without a steady income or a collateral with cleat titles. Small entrepreneurs in rural India will now face challenges without the access to capital from micro lending organizations.

At a time when all major economies are considering capital controls and protectionist trade practices, India – on the other hand - is surprisingly staying away from such measures.. It is true that India always had pretty much closed capital markets (especially the bond markets). However India’s resolve not to intervene in currency markets, and thus manipulate the currency, are refreshingly welcome.