In a week when the markets were largely awaiting the US fed meeting

WEEK IN A NUTSHELL

WIN-dow to the week that was

Week in a Nutshell (WIN)

Week

ended

19 Sept

2014

Key WIN-dicators

Indiabulls Power: Initiating Coverage

(BUY)

In a week when the markets were largely awaiting the US fed meeting

outcome on QE, the NIFTY ended largely without any major sectoral

moves.

US FED continued with scaling back of QE on expected lines. However, QE

would end by Oct-14 to be followed by a ‘considerable period’ of near zero

rates. Yellen steadfastly refused to clarify ‘considerable period’ in post

policy interactions. The big change however, was laying down the ‘policy

normalization plan’ of which two elements stood out – first the period of

‘normalizaiton’ of interest rates would be followed by a gradual shrinking of

Fed’s balance sheet. These elements mean we are looking ahead to a rather

prolonged period of monetary tightening the pace and extent of which

would presumably be ‘data dependent’.

For the time being this implies that the commodity meltdown to continue

deriving consequential benefit for India’s key macro variables while near

term volatility in INR too may remain prompting RBI to intervene more

frequently.

Back home, the inline reading on August inflation - CPI at 7.8% with core

inflation falling to 6.9% the lowest in the 32 month old new CPI series, WPI

at 3.7% slightly better than estimates, SBI & IIB cut deposit rates. While IIB

cut deposit rates on savings accounts – SBI has cut rates by 25bps in the 1

year – 3 year tenure which constitutes a bulk of its deposit base.

Inline inflation data, decent liquidity in the system with slower credit

growth, weakness in global commodities along with the first real possibility

of a diesel price cut provide a good backdrop in which the central banker

can consider rate cuts.

Some of the highlights of this edition:

INFOSYS: Why Sikka Bet can Pay Off

Initiating Coverage: Indiabulls Power (BUY)

Detailed Report: Delta Corp & Arvind Ltd

Infosys: The Third Ace?

Fund Folio: New Report

Nifty (+0.2%) WoW

WWW – WIN Weekend Wisdom

Opportunities come infrequently. When it rains gold, put out the

bucket, not the thimble

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

[W]INside this week’s edition

WIN-TERESTING DATA POINTS ........................................................................................................................................ 3

WINNING CHARTS............................................................................................................................................................ 4

INNING CHARTS FROM OUR

EPORT

: T

ELTING

OMMODITIES

...........................................................................................................4

WIN- RESEARCH HIGHLIGHTS OF THE WEEK ................................................................................................................... 5

INFOSYS: WHY SIKKA BET CAN PAY OFF; 14% B

ASE

, 29% B

ULL

ASE

..........................................................................................5

SBIN

AND

IIB

CUT DEPOSIT RATES

..........................................................................................................................................................5

UPIN AND

ERCK

ERONO SIGN A LONG TERM PRODUCT SUPPLY AGREEMENT FOR CONTRACT MANUFACTURING

.................................................5

RVIND

| SERIES 1: C

ROWN JEWELS ADDED

;

PROSPECTS BRIGHT

; B

EGINNING OF A MASSIVE RE

RATING CYCLE

;

REITERATE

........................6

NDIABULLS

OWER

NITIATING

OVERAGE

): B

UILDING BLOCKS IN PLACE

; V

ALUATIONS COMPELLING

; B

.........................................................6

SPOTLIGHT — DELTA CORP: B

EST PLAY ON

NDIA

S FLEDGLING GAMING INDUSTRY

; D

AMAN CASINO LAUNCH TO BE KEY TRIGGER

.......................7

WIN RESEARCH NOTE HIGHLIGHTS IN BRIEF ................................................................................................................... 8

FUND FOLIO – SEPTEMBER 2014: I

NDIAN

UTUAL

UND

RACKER

......................................................................................................8

BHEL: T

URN OF THE

IDE

; C

YCLICAL FACTORS SUPPORT RECOVERY

........................................................................................................8

METALS: R

ISK TO STEEL PRICES

;

EXPECT UPGRADE IN

ALCO AND

HZL; N

ALCO

, HZL

AND

JSW S

TEEL ARE TOP PICKS

...........................................8

ECOSCOPE: A

-14 WPI

58-

MONTH LOW

; WPI

3.7%,

PREMIUM FOOD ADDS ONLY

;

CORE EASES TO

3.5% ...................................8

INDIA STRATEGY - THE MELTING COMMODITIES: ADVANTAGE INDIA; SEVERAL SECTORS TO BENEFIT ........................................9

ECOSCOPE: E

XPORTS

IMPORTS GROWTH SLOWS

; T

RADE DEFICIT NEAR STATIC

;

NEAR TERM HEADWINDS FOR

INR ..............................................9

J&K B

ANK

: F

LOODS TO HAVE LIMITED IMPACT ON COMMERCIAL BOOK

; V

ALUATIONS REASONABLE

.....................................................................9

METALS WEEKLY: I

NDIAN STEEL PRICES UNDER PRESSURE FROM IMPORTS

..................................................................................................9

ECOSCOPE: R

AINS ABOVE

IMD

TARGET NOW

; D

EFICIT LOWERS TO

11%,

SOWING INCHES UP TO

95%

OF NORMAL

..........................................10

ECOSCOPE: I

NFLATION REMAINS HIGH

; IIP

LOWER V

S EXPECTATIONS

; CPI

7.8%

THOUGH CORE LOWEST EVER

; IIP

0.5% .........................10

WIN-SIGHT OF THE WEEK .............................................................................................................................................. 11

FTER A SHARP SLOWDOWN

STIMULUS IS BACK ON THE AGENDA

...............................................................................................................11

NIFTY VALUATIONS AT A GLANCE ................................................................................................................................. 13

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

WIN-teresting data points

Global Indices

Sensex

Nikkei

Hang Seng

Dow Jones

FTSE 100

Sectoral

Indices

Bank Nifty

CNX IT

BSE Oil

Bond yields-

India

1 Year

10 Year

16254

10959

11361

Last

Friday

8.68

8.50

16152

11224

11014

-0.63

2.42

-3

WoW change

(%)

-0.36

-0.56

13.91

15.01

10.55

Spread Vs

US 10 yrs

8.53

5.83

Currency

Rs Vs Dollar

Euro Vs Dollar

60.66

1.30

60.90

1.29

0.39

-0.77

Last

week

27061

15948

24595

16988

6807

Current

week

27090

16321

24306

17266

6867

WoW change

(%)

0.11

2.34

-1.18

1.64

0.89

P/E

Valuations

16.26

25.39

11.61

13.22

15.24

Commodities

Oil(US$/Bbl)

Precious Metals

Gold ($/OZ)

Silver ($/OZ)

Metals

Copper(US$/MT)

Zinc(US$/MT)

Aluminum(US$/MT)

This week

8.65

8.46

6866

2269

1993

6887

2257

1947

0.30

-0.54

-2.28

1230

1222

-0.66

-1.05

Last

week

96.41

This

week

96.3

WoW change (%)

-0.11

Top Gainers

Company Name

JK Tyre

NBCC

Monsanto India

Indiabulls Power

CARE

Sundaram Finance

BSE 500 – Key Movers

Top Losers

% Change Company Name

33%

25%

24%

18%

17%

13%

Den Networks

Kaveri Seeds

JSPL

Radico Khaitan

GMR Infra

Yes Bank

% Change

-15%

-13%

-11%

-10%

-9%

-8%

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

Winning Charts

Winning charts from our Report: The Melting Commodities

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

Win- RESEARCH HIGHLIGHTS OF THE WEEK

INFOSYS: WHY SIKKA BET CAN PAY OFF; 14% Base Case, 29% Bull Case

If Infosys’ (INFO) new CEO Dr Vishal Sikka’s latest blog is any cue, the company is set for a bigger transformation

than one may anticipate.

Our detailed report on Infosys presents possibilities.

15% BASE CASE, 29% BULL CASE RETURNS:

Our base case

assumes 12.5% growth in USD revenue over FY14-18E, which implies 14% annualized returns. Bull case returns

CAGR is 29%, with assumption of 16% revenue CAGR over FY15E-18E and 10% growth in FY15E.

Also, acquisitions present a meaningful upside risk to our base case estimates. INFO is the only stock trading at a

discount to its median, in a healthy industry environment.

Our Research

SBIN and IIB cut deposit rates

SBI by 25 bps in 1-3 year bracket ( 20% of total deposits) while IIB by 1% for saving deposits less than 100K

Our View:

Strong liquidity in the + lower credit growth led to bulk borrowing rates falling by ~30bp.

Further hopes of easing inflation has raised expectation of a rate cut by RBI.

Our Research View

Lupin and Merck Serono sign a long term product supply agreement for contract manufacturing

Lupin and Merck Serono sign a long term product supply agreement for contract manufacturing which Alok

believes although not LPCs philosophy could be a harbinger for a larger commercial arrangement.

Deal to fructify only in the longer run, core earnings growth remains strong. We maintain Buy with a revised

target price of INR1,650 (22x FY17E EPS+ Para IV pipeline valued at INR8/share). LPC is our top pick in large cap

pharma.

Our Research

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

Arvind Ltd | SERIES 1: Crown jewels added; prospects bright; Beginning of a massive re-rating cycle;

reiterate Buy

Click here to access detailed report

We extensively interacted with Mr. Sanjay Lalbhai, Mr. Kulin Lalbhai and Mr. Jayesh Shah and came out extremely

positive on their approach and vision for brands and retail expansion plans in India. We believe that the recent tie

up with Children’s place and GAP are transformational and major milestones for Arvind mills as it makes them

future ready and Brand Powerhouse in India.

GAP, a leading specialty brand retailer, with a global turnover of USD16.1b, has tied up with ARVND to open 40-

50 stores by FY18. The first store should be operational by May 2015, with the launch of the GAP Summer 2015

collection. ARVND plans an initial footprint of 15-20 cities across India for GAP stores. Each store, spread across

8,000-10,000sf, will be located in the most prominent location of the city. Each store will need an investment of

~INR100m for fixtures and other related capex, excluding working capital requirement.

ARVND will also have rights to sell GAP products through e-commerce platforms, a huge opportunity over the

long term. The management believes that GAP can generate annual revenue of INR10b in the next five years,

with 9-10% EBITDA margin in two years of operation.

Globally, GAP store launches have been huge impact events and the management indicated that India would be

no exception. Globally, GAP has seen a flood of footfalls on day-1 of its launch of new stores, with long queues.

We believe ARVND’s tie-up with GAP highlights the management’s vision to be future ready and create large

engines of growth for the long term.

The Children’s Place, the largest pure-play children’s specialty apparel retailer in North America, with a turnover

of USD1.8b, has also tied up with ARVND. The plan is to open 50 stores across 15-20 cities by FY18, with average

store size of 2,000-3,000sf. The first store should be launched by fall, 2015. The Children’s Place will be first of

its kind children’s retail format in India, with a one-stop shop offering trend-right assortment of apparel and a

full line of accessories and footwear for kids from newborn to 10 years of age at competitive prices. The

Children’s Place could be an INR5b brand in India in five years.

We believe this transaction is truly transformational and a huge milestone for Arvind warranting a re-rating in

the stock. We value the stock at 9.5x FY16E EV/EBITDA and upgrade our target price to INR400 on the stock

(Previous target price INR300).

Indiabulls Power (Initiating Coverage): Building blocks in place; Valuations compelling; Buy

Click here to access detailed report

IBPOW’s capacity will grow to 2.7GW by CY15, 3x the current 810MW. It is best placed on several fronts: (a)

2.1GW of net capacity (~85% of total capacity) tied up under LT PPA with reasonable tariff, (b) 9.7mtpa of

domestic linkages/FSA for projects, (c) 84% of capex already incurred, with equity infusion of 88%.

Visibility of PPA/FSA is crucial, given that open capacities face issues of both fuel availability and transmission. In

addition, IBPOW has land and requisite clearances for ~4GW of capacity, offering visibility on growth option.

IBPOW also stands out given that it is not affected by captive coal imbroglio.

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

IBPOW’s bid tariffs for power projects are skewed in favor of variable component, providing leverage to high

generation/PLF. Secured PPA, sub-INR4/unit average tariff, and PPAs with financially better placed DISCOMs

would trigger higher generation, as demand outlook improves. Also, approval of compensatory tariff towards

cost of imported coal aids project profitability. Core returns/profitability from generation are close to regulated

returns (RoE of ~20%) and offer comfort.

FY17 would be the first full year of operation for the entire 2.7GW of projects. We expect PAT to grow from

INR232m in FY15 to INR5b in FY16 and further to INR8b in FY17Strong earnings growth and limited capex should

drive free cash flows. Consolidated FY17E DSCR of 1.2x and DER of 1.5x are comfortable.

The stock has corrected significantly from its all-time high of INR45 in FY09. It now quotes at compelling

valuations – 6.4x FY16E EPS, 0.6x FY16E BV (RoE of 9%), and EV of 5.1x FY16E EBITDA. We initiate coverage with

a Buy rating. Our SOTP-based target price is INR21.

SPOTLIGHT — DELTA CORP: Best play on India's fledgling gaming industry; Daman casino launch to be

key trigger

Click here to access detailed report

DELTA is India's first listed pure-play gaming company. It owns three of the six licenses for offshore casinos in

Goa and enjoys a dominant share of India's offshore casino market. In 2HFY15, it will be launching (subject to

approvals) a casino housed in Daman's only five-star hotel; this will be Daman’s first casino.

Daman is likely to be much larger footfall market than Goa, attracting huge crowds from Mumbai and Gujarat.

DELTA is by far the largest casino operator in India, with ~2,000 gaming positions. The launch of its casino in

Daman (subject to approval) and commencement of its offshore property, Deltin Caravela in Goa will take its

capacity to ~3,400 gaming positions.

DELTA has exited its real estate business in FY14. Its core business going forward will be gaming and gaming-

related hospitality. We expect DELTA's revenue to grow at a CAGR of 5% over FY14-17, led by 30% CAGR in its

gaming and hospitality business. EBITDA would post 15% CAGR, with margin expanding from ~27% to ~35%.

PAT would grow at a CAGR of 49%. Cash flows and return ratios should improve substantially, going forward.

We expect DELTA to be a debt-free, net cash company by FY17.

DELTA trades at 49.7x FY15E, 21.4x FY16E, and 14.4x FY17E earnings. We do not have a rating on the stock.

However, given the significant growth potential for India's gaming industry, DELTA's dominant position, and

strong earnings outlook for its gaming business, we believe it is well placed.

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

WIN Research Note highlights in Brief

FUND FOLIO – SEPTEMBER 2014: Indian Mutual Fund Tracker

Click here to access detailed report

AUM: At life-time high; up 0.6% MoM

In August 2014, total AUM of the mutual funds industry grew 0.6% MoM to a life-time high of INR10.1t.

Equity AUM was at INR2.3t, accounting for 23% of total AUM and 2.5% of India’s market capitalization.

Domestic mutual funds remained net buyers in equity markets for the fourth consecutive month, at INR70b.

These were the highest inflows since January 2008. Total inflows for FY15YTD were INR155b against outflows of

INR212b in FY14.

BHEL: The Turn of the Tide; Cyclical factors support recovery

Click here to access detailed report

We expect Industry BTG project awards to improve from just ~6GW in FY14 to ~10-12GW pa during FY15-17E,

leading to a 40% increase in BHEL’s power sector intake during FY15-17E (vs FY12-14 levels). For BHEL, power

segment BTB declined from peak levels of 5.2x in 3QFY09 to 2.6x, and we expect the ratio to stabilize at ~ 3x by

end FY15E. Our macro analysis suggests that normative industry ordering stands at ~20-24GW pa (power

demand at 1.5BUs in FY19E). The journey from 6GW in FY14 to 10-12GW pa in FY15-17E and then at ~20-24GW

pa provides interesting possibilities.

Recent pricing trends in EPC contracts suggest stabilization, albeit at lower levels. From a market structure that

was threatened by: i) intense overseas competition and ii) possibility of ~5-6 players in the domestic market, the

BTG manufacturing sector has consolidated, with just ~3-4 serious players in Boilers / Turbines commissioning

manufacturing facilities.

BHEL has expanded its offerings to capture a larger share in project execution. Cost structure has also been

corrected given various initiatives, including achieving ~90% indigenization levels for supercritical boilers in the

last tender (vs ~70% in bulk tender projects).

METALS: Risk to steel prices; expect upgrade in Nalco and HZL; Nalco, HZL and JSW Steel are top picks

Click here to access detailed report

Indian steel prices are coming under pressure from weakening import prices. India HRC import prices have

corrected to USD520/t, after holding in a range of USD535-545/t for the past five to six months. We expect a

similar correction to flow through in Indian flat product prices.

Indian long product market never worried about imports. This does not hold true anymore. Imports from the

oversupplied Chinese market have started to trickle into India. Indian long product prices have held steady on

local shortage of iron ore, coal and expensive credit, while Chinese steel prices have trended down on steep fall

in raw material prices due to global oversupply.

Thus, we expect earnings upgrade in Nalco and HZL. JSW Steel’s earnings are likely to be resilient. There is a

downside risk to Tata Steel, SAIL and Jindal Steel & Power. Hindalco too will be a beneficiary of surge in alumina

prices, though the issues of coal block de-allocation will be a drag on the stock. Nalco, HZL and JSW Steel are our

top picks.

ECOSCOPE: Aug-14 WPI at 58-month low; WPI at 3.7%, premium food adds only 74bp; core eases to

3.5%

Click here to access detailed report

Aug-14 WPI inflation eased to 3.7%, somewhat better than expectations. Inflationary build up at 3% at end Aug-

14 vs. 5.2% during Aug-13.

The drop in WPI inflation was however, achieved largely due to base effect while MoM pull remained restrained

too.

Food inflation dropped to 32-month low both due to base effect as well as lower MoM increase in index. Most

categories of food inflation eased while vegetables witnessed disinflation on a very high base. The contribution

of premium food inflation showed a steep decline to 74bp as compared with more than 100bp for previous five

months.

Fuel group showed disinflation first time after a gap of 56 months.

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

INDIA STRATEGY - THE MELTING COMMODITIES: ADVANTAGE INDIA; SEVERAL SECTORS TO BENEFIT

Click here to access detailed report

Global slowdown and transatlantic policy shift weighs on commodities

Global growth has disappointed again belying expectations of a quick recovery. IMF downgraded growth

estimates for 2014 and 2015 for most major economies of the world. The emerging economies particularly

China and India, continue to grow at a much faster rate than the advanced countries.

On the other hand, withdrawal of extraordinary monetary accommodation by US contrasts with continued

accommodation by Europe, Japan and China. This transatlantic policy divergence is creating ripples in the

financial market with sharp increase in USD contrasting with a sharp drop in both oil and many other hard and

soft commodities.

Integrated steel producers (Tata Steel and SAIL) are unlikely to benefit from fall in iron ore prices instead

increased royalty and closure of iron ore mines in Jharkhand will add to costs. Declining steel price will further

put pressure on margins. Non-integrated steel producers like JSW Steel may not see pressure on margin as

cheaper iron ore and coking coal prices reduce costs for them.

ECOSCOPE: Exports, imports growth slows; Trade deficit near static; near term headwinds for INR

Click here to access detailed report

During Aug-14, exports at USD27b grew by 2.3% YoY. Imports at USD38b showed marginally slower growth of

2.1% YoY. Total trade at USD65b fell MoM but registered moderate YoY growth of 2.2%. In effect trade hasn’t

really grown from 2011 levels.

Exports growth was restricted to a few commodities. Imports of oil declined by 15%. Gold imports at USD2b

recovered to their FY14 average levels. Non-oil-non-gold imports registered impressive growth of 8.2%.

Trade deficit remained stable at USD11b or 0.5% of GDP.

During Apr-Aug exports showed a growth of 7% to USD135b while imports declined by 3% to USD191b. Trade

deficit corrected sharply to USD56b (2.7% of GDP) from USD71b (3.8% of GDP).

We expect FY15 trade deficit to remain contained at 7.9% compared with 7.4% in FY14 as higher imports on

economic growth increased gold imports are nullified by falling commodity prices.

We expect near term volatility for INR due to disturbances in the financial market on account of US and other

advanced countries following divergent monetary policy. However, we expect RBI to intervene to keep INR

relatively stable among other emerging countries.

J&K Bank: Floods to have limited impact on commercial book; Valuations reasonable

Click here to access detailed report

We met Mr Mushtaq Ahmad, Chairman and CEO, J&K Bank (JKBK), to understand the bank’s outlook on

business growth, profitability, and asset quality.

In the wake of recent floods in Jammu and Kashmir, and asset quality issues, growth could moderate. While

slippages in the agri and horticulture book might see an uptick in the near term; damage to the commercial

book is likely to be limited.

We expect return ratios to be under pressure in the near term. However, at 1x FY16E BV, valuations largely

factor in the negatives.

METALS WEEKLY: Indian steel prices under pressure from imports

Click here to access detailed report

India HRC import prices have corrected to USD520/t. Expect a similar correction to flow through in Indian flat

product prices.

Global iron ore prices down by 35-40% CYTD @ to USD82/dmt cfr China basis .

Coking coal prices declined by ~15% to USD108/t fob Australia basis.

Indian steel mills are hoping for anti-dumping action by Government of India to protect them, and acceleration

in domestic demand in 2HFY15.

Our View: Thus, we expect earnings upgrade in Nalco and HZL. JSW Steel’s earnings are likely to be resilient.

There is a downside risk to Tata Steel, SAIL and Jindal Steel & Power. Hindalco too will be a beneficiary of surge

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

in alumina prices, though the issues of coal block de-allocation will be a drag on the stock. Nalco, HZL and JSW

Steel are our top picks.

ECOSCOPE: Rains above IMD target now; Deficit lowers to 11%, sowing inches up to 95% of normal

Click here to access detailed report

Rainfall continued with large surplus in second successive weeks with 64% surplus on top of 24% surplus during

previous week.

Thus, cumulative rainfall deficiency improved to 11% (compared with the revised target of 13% deficit by IMD

for the whole season). IMD’s target would be maintained now even with 32% deficit for the remaining days of

the season.

Nearly 72% of the country received normal/surplus rainfall vs. just 20% till mid-July. Still, rainfall remains

deficient in all regions, most acute being North-West India (-19%).

Sowing however, inched up to cover 95% of normal area; only a tad below 98% during the same period previous

year. The area to cover now (as % of normal area) is 6% for rice, 10% for pulses, 20% for coarse cereals.

However, area sown under cotton was 27% higher than normal area.

ECOSCOPE: Inflation remains high; IIP lower v/s expectations; CPI at 7.8% though core lowest ever; IIP

at 0.5%

Click here to access detailed report

The Aug-14 CPI Rural Urban (CPI-RU) inflation remained high at 7.8% broadly in line with expectations. YTD CPI

was steady at 8%.

The high CPI inflation was due to high vegetables inflation (15% adding 106bp) and fruits inflation (24% adding

another 50bp).

Core inflation slumped to the lowest ever of 6.9% in 32 months of the new CPI series while rural and urban core

too converged. Thus, vegetables inflation is yet to be generalized. Rural inflation stayed higher for all sub groups

within CPI.

The sharp fall in international commodity prices would exert a downward pressure on inflation. Thus we expect

RBI to keep policy rates unchanged.

Jul-14 IIP at 0.5% was well below expectation and represented a sharp MoM deceleration from 3.9% a month

ago.

However, mining growth continued while electricity too maintained double digit growth.

Capital goods showed degrowth after three months shaving off 53b from overall IIP. Sharp and continued

degrowth in consumer durables shaved off another 286bp. Non-durables however, staged a moderate recovery.

We expect the sharp deceleration to be temporary and possibly caused by inventory de-accumulation. Hence,

we hold FY15 IIP will register 5.2% growth, helped by a low base, proactive policy and return of consumer

sentiments.

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

WIN-sight of the Week

After a sharp slowdown, stimulus is back on the agenda

WHEN Li Keqiang, China’s prime minister, spoke at a big business meeting earlier this month, he trumpeted two

achievements. Not only had the government overseen steady economic growth, he said, but it had done so without

resorting to a big stimulus. Both assertions are now looking rather doubtful.

A barrage of data for August pointed to a sudden weakening in growth, catching many analysts and investors by

surprise. Although it is unwise to read too much into one month’s numbers, the figures had a distressingly uniform

downward tilt. Investment, retail sales and credit issuance all slowed. Industrial output, which is closely correlated

with GDP given the size of China’s manufacturing sector, grew at its weakest pace since late 2008, when the global

financial crisis was battering the economy. Housing sales, already struggling, contracted further; they have fallen 8%

so far this year. That has started to eat into the revenues of local governments, since property developers are

holding back on land purchases. Yao Wei of Société Générale, a French bank, called it a “shockingly sharp”

deceleration.

Until the gloomy data started to pile up, China’s economy had seemed to be following an established pattern. A

wobbly start to 2014 had prompted the government to come up with a series of policies to revive growth. It sped up

spending on infrastructure and cheap housing, while the central bank administered a small dose of monetary

easing. In 2012 and again in 2013 measures of more-or-less the same design had been enough to keep the economy

going. But this year the jolt lasted for little more than a month before petering out.

Trouble in the property sector, which directly accounts for about 15% of China’s GDP, is the biggest single factor. A

glut of unsold homes has started to weigh on the market. Inventories at listed developers rose by a quarter in the

first half, reaching 65% of their assets, an all-time high, according to CICC, a Chinese investment bank. The pain is

even spreading to the biggest cities, especially in suburbs where building has been most frenetic. In Jiading, a

northern district of Shanghai, the streets are lined with ads for new homes, yet the showrooms of its sprawling

developments receive few visitors.

The good news is that property is getting more affordable: the average home costs about 8.8 times the annual

income of the average Chinese household, down from nearly 12 times in 2010, according to an index calculated by

the Economist Intelligence Unit, a sister company of The Economist. The bad news is that the market may yet be far

from bottoming out.

Another reason for the economy’s weakness is Mr Li’s desire to wean the economy off its rising dependence on

debt, which has soared to more than 200% of GDP. China has not yet started deleveraging, but credit is at least

growing more slowly as regulators force banks to hold more capital to cover loans they have kept off their balance-

sheets. When the prime minister spoke at a World Economic Forum event in Tianjin on September 10th, he had

surely been briefed in advance about the poor August data. Yet he still persisted in ruling out a “strong economic

WIN – Week In a Nutshell

Sept 19

2014

WEEK IN A NUTSHELL

stimulus” and instead emphasised the importance of reforms—an indication that the government will tolerate the

current slowdown.

Mr Li, though, is not willing to let the slowdown turn into a rout. On September 16th, local media reported that the

central bank had injected 500 billion yuan ($81 billion) into the financial system via loans to big banks. It is

customary for the central bank to pump out cash before China’s two annual weeklong holidays, one of which begins

in early October, as demand for money spikes. But the special loan was far bigger than anything of its kind in the

past.

The central bank did not actually announce the loan, doubtless because it did not want to look like it was going back

on Mr Li’s pledge to refrain from stimulus. Instead, word of it spread on Sina.com, a web portal. “Because it is so

low profile, a large part of the effectiveness is wasted,” says Larry Hu of Macquarie Securities. Evidence from earlier

this year is that stealthy forms of monetary easing do not have a lasting impact, since businesses are uncertain

about what the government actually intends. Mr Li himself appears uncertain. Refraining from large-scale stimulus

is the right medicine for the economy in the longer term. But there is no sense in pretending that fast growth can be

sustained this year without it.

WIN – Week In a Nutshell

Sept 19

2014