World Markets Simplified

Is the Maharashtra government dillydallying on ordering a CBI inquiry into the issue of the alleged illegal sale of Waqf land to industrialist Mukesh Ambani for his 27- storey ultra luxury home that is worth nearly $ 2 billion? The state government had received a letter from the Union government in June, asking it to consider ' referring' the matter to the premier investigating agency to probe the land deal. The state has, however, not taken any decision on the matter yet.

The land deal on Mumbai's posh Altamount Road has been embroiled in a controversy ever since Ambani began building his multistorey residence Antillia. On Monday, the issue was raised in the state assembly by Opposition leader Eknath Khadse.

He said the Rs 500- crore plot was shown to have been sold by the Karimbhai Ibrahimbhai Khoja Charitable Trust for just Rs 21 crore. The piece of land was originally reserved for educating children of the Khoja Muslim community.

Maharashtra's minority affairs minister Arif Nassim Khan said the state had received a letter from the Centre and had sought the opinion of the law and judiciary department.

" The legal department conveyed its opinion to the state home department on July 25," Khan said. But he did not reveal what the law department's stand was.

Khan further said a notice was served to the trust by the Maharashtra government in 2004 over the transaction. It was, however, withdrawn after the state got ` 16 lakh from the trust to regularise the deal.

Maharashtra home minister R. R. Patil said he would comment on the matter only after seeing the opinion given by the law and judiciary department.

This Waqf land deal has sparked rows earlier, too. In 2007, then minority affairs minister Anish Ahmed had mentioned a number of irregularities in the sale of the land and had asked the Maharashtra State Waqf Board to take back the plot. However, in a curious development, while the minister kept claiming the sale was illegal, then chief minister Vilasrao Deshmukh said there were no irregularities in the deal.

Incidentally, Ambani has still not started living in Antillia.

Articles in this series are exploring the extent and impact of corporate secrecy in the United States.

NEW YORK - A spate of spectacular collapses of Chinese stocks listed on American exchanges has cost U.S. investors billions of dollars. The fiasco has sparked multiple investigations. Accusations are swirling in Washington and Beijing.

It all began with an email sent out of the blue a decade ago to a Texas businessman named Timothy Halter.

The email came from Shanghai native Zhihao "John" Zhang. The former medical student introduced himself and asked: Was Halter interested in helping bring Chinese companies to the U.S. stock market? Zhang proposed using a backdoor method that the Texan had mastered for American firms: buying dormant shell companies listed on U.S. exchanges. Soon, Halter and Zhang brought two Chinese firms to market in America: a manufacturer of power-steering systems and a maker of vitamins, weight-loss supplements and household cleaners

The email led to a boom for a niche industry of advisers who specialize in a brand of deals, called the "reverse merger," that use shell companies to give clients easy entry into U.S. capital markets. More than 400 Chinese companies seized the chance.

Leading the way was Halter, a slim, salt-and-pepper-haired man who played a direct or indirect part in 23 deals; staked his name on at least 20 other deals done by his Shanghai partner, Zhang; and paved the way, through conferences in China, for dozens of other deals.

It was a lucrative gambit: Halter lives with his family on a 50-acre ranch in Texas, where he breeds bass.

His firm, Halter Financial Group, threw splashy "summits" to promote the industry, including a gathering headlined by former President George W. Bush in 2010. Its website boasts: "Reverse Merger Experts!"

But deals birthed by Halter and his imitators are now blowing up.

Investors have alleged widespread accounting irregularities and other problems at dozens of the Chinese companies that reverse-listed in the U.S., causing share prices to nosedive. Since March, some 30 Chinese firms have seen their auditors resign and at least 25 have been delisted from U.S. exchanges.

A Reuters examination of a cross-section of 122 Chinese reverse mergers on U.S. markets found that between each stock's peak trading price and July 10, 2011, those companies saw a total of $18 billion of their market capitalization vanish.

Reuters interviewed nearly 100 industry participants and examined financial records of dozens of Chinese companies to paint the most detailed picture yet of the network of dozens of players involved in the reverse-mergers boom.

That industry hinges on a handful of leading "shell brokers" such as Halter who purvey paper companies; investment banks who specialize in financing a firm after a reverse merger; and auditors, usually small shops, who are lightly regulated in the U.S.--and not at all in China and Hong Kong. The controversy has stirred up new tensions between Washington and Beijing, which held talks on the matter in July. The Public Company Accounting Oversight Board, the U.S. auditing watchdog, issued a report in March about potential problems with the audits of Chinese companies formed through reverse mergers. The Securities and Exchange Commission has set up a working group to examine Chinese reverse mergers, and the Federal Bureau of Investigation has opened its own broad investigation, say people familiar with the situation.

The Chinese reverse-merger boom and bust offer insight into a little-understood corner of American business: the widespread use of shell companies, which can offer their owners a way to minimize regulatory scrutiny. The U.S. in recent years has called for much greater transparency in global business transactions. But on American shores, opaque shell companies are rife.

"It appears that some Chinese firms have seen a way to access the strongest public markets in the world, but through the weakest area of enforcement," says Republican Rep. Patrick McHenry, a member of the House Committee on Oversight and Government Reform.

A reverse merger hinges on a shell company-a firm without meaningful assets or operations, used as a vehicle for transactions-that's already listed on a stock exchange.

A deal typically starts with a so-called shell broker, anyone from a small shop to a larger firm such as Halter's. Brokers acquire shells, often domiciled in a secrecy-friendly state such as Delaware, Utah or Nevada. The broker then sells the U.S. shell to an operating company seeking to trade on a U.S. exchange-a transaction which, unlike an initial public offering, isn't overseen by regulators.

The acquiring firm thus becomes a publicly-traded company, with access to U.S. investors - but without the time, expense and scrutiny of a traditional initial public offering. Companies are incorporated under state rather than federal law, and so the federal overseer of stock flotations, the Securities and Exchange Commission, doesn't as a matter of course review reverse mergers until after the deal is done.

In Chinese deals, the buyer is often a holding company based in Delaware, the British Virgin Islands or other tax haven, which in turn controls the actual operations on mainland China. This structure complicates the ability of U.S. regulators to dig into the accounts of the resulting firms.

In recent years, one in three U.S. reverse mergers involved a Chinese operating company. In 2010, 260 reverse mergers were completed, according to deal tracker PrivateRaise. Of those, 83 deals involved operating companies in mainland China.

There are more than 1,200 dormant public companies in the U.S., PrivateRaise says. They can be purchased for as little as $30,000, then sold by shell brokers for as much as 10 times that amount or more. Brokers say that in 2007 and 2008, the peak of the market, Chinese firms would pay up to $800,000 for a high-quality shell, one with no lingering liabilities. Reverse mergers, to be sure, are a legitimate way to gain access to capital for smaller companies that can't afford a full-fledged initial public offering or don't need to raise large sums. The problem isn't the technique, defenders argue, but rather people who misuse it.

David N. Feldman, a New York lawyer and author of a book about reverse mergers, notes that the large majority of Chinese deals are good ones, and that IPOs are also subject to abuses. Chinese software maker Longtop Financial Technologies Ltd. achieved a peak market value of $2.3 billion on the New York Stock Exchange after its IPO, but came under regulatory scrutiny this spring and is now being de-listed from the Big Board.

The industry has roots in the Colorado mining boom and bust of the 1950s, when entrepreneurs bought up failed listed companies. Timothy Halter's breakthrough was to spread the tactic to China. Halter, the founder and president of boutique firm Halter Financial Group in Argyle, an affluent suburb northwest of Dallas, did a handful of reverse mergers, all for American companies, in the seven years after opening his company in 1995.

Zhang, who lived in Toronto, found Halter by Googling "reverse mergers," according to people who know both men. China was the world's hottest economy, and Halter was intrigued by Zhang's email and subsequent calls, these people say.

Their first Chinese reverse mergers-involving household cleaning-goods maker Tiens Biotech in 2002 and China Automotive in 2003--caused a sensation.

"These were the two deals that really got everybody's attention," said Beau Johnson, managing director of Chinamerica Holdings, a financial advisory and investment fund in Richardson, Texas, which owns shells and has done several Chinese reverse mergers. "The industry just snowballed from there."

After the first two deals, the Texan sent Zhang back to Shanghai to open an outpost and scout Chinese firms ripe for an American listing. Zhang, who once aspired to be a doctor and graduated from Fudan University Medical School in 1990, began scouring China for businessmen who dreamed of ringing the opening bell on Nasdaq. He set up New Fortress Group Ltd., a British Virgin Islands entity, to take stakes in deals. Zhang declined to comment for this article.

Halter gained note as a guru on the nascent market for Chinese mergers-and touted his new Halter USX China Index, the first to track Chinese companies trading on U.S. exchanges. In 2004, he told a Congressional panel on China that "there is prestige and credibility in a US listing. It is also understood by Chinese companies that our standards are high and it is not an easy task to comply with the requirements to be a public company in the U.S."

In 2008, Halter trademarked in the U.S. his secret sauce: a transaction he dubbed the APO, or Alternative Public Offering. It combined a reverse merger and a financing arrangement called a private investment in public equity, or Pipe, that allowed firms to go public and raise money in one fell swoop. Halter's trademark application said he had "instructed hundreds of attorneys, CPAs and professionals about the reverse merger process."

Reuters identified 17 deals arranged by Halter Financial Group, and six in which Halter brokered the shells used in transactions orchestrated by others. The firm consulted dozens more Chinese companies on preparing to go public, introducing them to auditors and lawyers needed for the deals. People in the industry estimate Halter has had a hand, direct or indirect, in one in eight Chinese deals listed on American exchanges.

Halter's deals sometimes use a dizzying array of shells. His firm arranged a reverse merger in 2010 for Long Fortune Valley Tourism, a Chinese company that describes itself as focused on "cave tourism." The merger involved shell companies in Texas, Delaware, Hong Kong, the Cayman Islands and the British Virgin Islands. The original shell used in the deal was created years earlier by Halter to buy up a bankrupt chain of nursing homes.

In addition to taking stock in the shells used in his transactions, Halter also earned "finder's fees" through his affiliated broker-dealer firm, Halter Financial Securities. HFS referred Chinese companies to investment banks, which then raised money for them.

One of the leading banks in the game was Roth Capital Partners of Newport Beach, California. Led by Chairman Byron Roth, its specialty is to provide financing to Chinese clients after a reverse merger. Roth says it has raised more than $3 billion for U.S.-listed Chinese companies. Such deals accounted for nearly half of the $1.9 billion in capital Roth raised for clients in 2009. Roth's heady success was reflected in the glitzy conferences it threw for the industry. In March, more than 3,000 hedge-fund managers, accountants, lawyers, bankers and financial advisers flocked to the Ritz Carlton Hotel in Dana Point, southern California.

Just hours after the Public Company Accounting Oversight Board issued its warning about Chinese reverse mergers, Roth threw a wear-only-white "Miami Glam" party in an elegant tent. Guests stood surrounded by rhinestone-encrusted sculptures of leopards. Bikini-clad hostesses served cotton candy as rapper Pitbull put on a concert. For the more conservative Chinese guests, Roth organized a lavish banquet nearby at the posh Resort at Pelican Hill.

"They don't like our food. And they don't like rap," explained one organizer.

Not all of Roth's deals have stood the test of time. One client, China Biotics, a maker of so-called pro-biotic food products, delisted from NASDAQ in June, 19 months after Roth helped it raise more than $79 million from investors. China Biotics' auditor resigned amid accusations that the company forged documents and created a fake website that overstated its cash holdings. Byron Roth, Roth's chief executive, declined to comment.

Just as crucial to the industry were the accountants. To do a reverse merger, the acquiring company needs to hire an auditor registered with the PCAOB.

It became common for small audit firms far from China, often with no affiliates in the country, to sign off on books and records kept halfway around the world. In the U.S., the PCAOB reviews small auditing firms only once every three years.

In Bountiful, Utah, the small firm of Chisholm, Bierwolf and Nilson used its experience with U.S. shell companies to win referrals to a global client base. From a suburb of Salt Lake City, the firm audited clients in China-and South Korea, Bolivia, El Salvador and Kazakhstan as well. CBN was a deal, charging about half the going rate for a comparable sized firm in New York or California. "We didn't ever have to do any advertising," said Todd Chisholm, a former managing partner at CBN.

Todd Chisholm prospered. An avid golfer, he and his then-wife built a $1 million home on a golf course not far from his Bountiful office. In 2006, Chisholm got a referral to a company called Hendrx, formed in 2004 through a reverse merger with a U.S. shell, with primary operations in China, according to Chisholm and two others directly involved.

Hendrx described itself as a manufacturer and distributor of devices that purify, filter and generate water from moisture in the air. But the business wasn't making money, executive turnover was high, and Hendrx had been sued for alleged contractual fraud and patent infringement, SEC filings show.

Over the next four years, Todd Chisholm audited Hendrx's books, giving a clean bill of health, though noting questions about the company's ability to continue as a going concern. Once a year, he visited the Chinese operations for week-long reviews.

The PCAOB later found these audits to be grossly inadequate. According to an April 8 PCAOB disciplinary order, Chisholm and his partner, Troy F. Nilson, were each auditing on average 25 companies in 2006 and 2007. About half of those were shell companies, Chisholm says.

Neither Chisholm nor Nilson spoke Chinese, the PCAOB noted, and they relied on less-experienced native-speaking staff in the audit process. In January 2009, Hendrx lost its final appeal of the patent infringement case and, unable to pay a $1.2 million judgment, turned over ownership of all its operations to its creditors. Worth $37 million at its peak, Hendrx has lost nearly all its value, its thinly traded shares now fetching less than a penny apiece on the Over the Counter market.

The PCAOB found the audits at Hendrx and three other clients so troubled that it barred Todd Chisholm and his namesake firm from auditing U.S.-traded companies for life. His partner, Nilson, was banned for at least five years. Chisholm acknowledges that his staff was stretched thin, but stands by the effectiveness of the audits. Nilson didn't reply to requests for comment. Despite his ban by the PCAOB, Chisholm is working on four or five planned Chinese reverse mergers through a new consulting firm, Fairway Mergers Inc. He says he is no longer acting as auditor of their financial statements, but is advising the companies and their investors on their numbers and how to prepare for a U.S. audit.

"I'm very much enjoying not being an auditor. I don't see myself ever going back there," Chisholm says. In the new venture, "I've got talent and expertise that I can use."

Last year in Shanghai, where he had built up a staff of 40, Halter staged his own answer to rival Roth Capital's gatherings. His firm brought in former President George W. Bush and former Bush Treasury secretary John Snow as featured speakers on the global economy. Spokespeople for Bush and Snow declined to comment.

This year, the boom turned bust. Last summer, short sellers, who bet that a share will decline in price, began targeting Chinese reverse merger stocks. Those stocks started crumbling, regulators began opening probes, and a host of auditors resigned, often citing concerns about cash balances and management integrity. Three companies Halter has worked with are among those that hit the rocks.

ShengdaTech, a KPMG-audited chemicals maker in which Goldman Sachs took a 7.6 percent stake, saw auditor KPMG resign in April, citing "serious discrepancies" in its bank statements and representations of customers. ChinaAgritech, a fertilizer maker that garnered investments from private-equity giant Carlyle Group, was delisted from Nasdaq in May for not filing its annual report on time, three months after a short seller said a visit had shown the company's factories idle and suppliers non-existent.

Also in trouble is China Automotive, one of the two Halter deals that set off the boom.

In April 2007, the PCAOB issued a report faulting China Automotive's Toronto-based auditor, Schwartz Levitsky Feldman, for "deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements." The agency did not identify the audit clients in question, but last April it reported finding the same problems in a new inspection.

In December, Schwartz Levitsky Feldman resigned as China Automotive's auditor. In March, the company said it would restate earnings for 2009 and the first three quarters of 2010. That drew a warning from Nasdaq that it was in danger of not being compliant with SEC requirements on timely filing of financial reports. China Automotive did manage to submit its filings, but has seen its stock fall by two-thirds since January 2010, wiping out $471 million in market value.

Halter has not been accused by the SEC or PCAOB of any wrongdoing. "Our business model is to work with the companies that seek to access the US capital markets and that represent to us that they meet certain financial requirements," Halter said in an email in response to queries. "We then introduce these companies to PCAOB-registered accounting firms and multinational law firms."

The world that Timothy Halter helped create may be in for serious change.

In recent months, the SEC has begun taking a much closer look at the filings that follow a reverse merger, according to investment bankers and lawyers whose clients are being reviewed. The agency has suspended trading in at least three stocks. Representatives from the SEC and the PCAOB recently visited China to discuss better cooperation on the auditing side. John Zhang, still in Shanghai, is focusing on getting Chinese firms listed in Germany and Hong Kong. A spokesman declined to provide further details about his work or his early career. Timothy Halter, for his part, is distancing himself from the industry.

"Our model has not changed," he told Reuters in an email exchange. But he did "not anticipate doing any Chinese APOs in the near future." Last month, Tiens Biotech, one of Halter's two breakthrough Chinese clients, said it was changing course. It's now de-listing and taking itself private.

The method? A series of mergers--with shell companies registered in Delaware and the British Virgin Islands.

The country's largest telecom service provider Bharti Airtel on Monday proposed an annual pay package of up to Rs 70 crore for chairman Sunil Mittal. 

The company has sought shareholders approval for the same in the annual report released on Monday. 

This will be more than double his last fiscal remuneration of Rs 27.5 crore, which is about 76% of the combined pay package of all directors in fiscal ended March 31, 2011.

As per the annual report, Mittal's remuneration rose by Rs 4 crore or 17% from his 2009-2010 fiscal's package of Rs 23.5 crore. Bharti Airtel also sought its shareholders' approval for re-appointment of Mittal as its managing director for another five-years with effect from October 1, 2011.

"This does not mean that Mittal's salary would be increased to Rs 70 crore. The company has sought approval so that one need not go to the board every time," said a company official.

Salman Khan worth Rs 50 crore now!

After the recent success of his movies, Salman Khan has hiked his price to Rs 50 crore. The actor who was charging 40 crore for a movie will now take home a whopping amount of Rs 50 crore. With Aamir Khan and Shah Rukh Khan taking full control of their box-office successes and turning it into a financial gold mine, how can Salman Khan be left behind? The actor enjoying his recent success run in Bollywood, with two back to back hits in Dabangg and Ready.

Filmmaker Bhushan Kumar told Jha that Salman's price has been re-structured for his next movie. "When Salmanbhai did" Ready" the film industry was facing a huge financial crunch. But he agreed to cut down his price from Rs 40 crore to Rs 17 crore. This was the only way we could have made Ready at that time. Now the market has changed for the entire film industry. So, we are currently re-negotiating with him for our next film."

It is said that Salman has not only hiked his fee but also has started taking interest in the unit of the film and the cast. "Salman is not only quoting a fee close to Rs 50 crore, he is also 'recommending' (Ready: appointing) directors for these films. Like, for the T Series project Salman has put forward the names of two directors and has asked producer Bhushan Kumar to choose from one of them. Furthermore, he insisted on Sonakshi Sinha for Kick and now he's recommending Zarine Khan to his prospective producers," a source told film expert Subhash K Jha.

US stock market continued their downtrend with an excess of volatility at the opening session of Wednesday morning. Asian markets were close higher after finding some ground in a hope that equity markets of US will hold the levels but as soon as the markets opened wednesday, equities continued to loose and Gold rising again logging another record price in history. All these indicators were implicating market downtrend without any specified bottom and might continue free fall in panic sell offs. It might not be a good time to get into it. If you hold any cash just stay away from Markets and who are already in it might not have any option left after such a sell off.

We had seen such a dire consequences after Lehman Brothers' collapse in 2008, this might be the repeat of same panic reactions in US equities and spread throughout the world as other markets will follow US tomorrow. If you are a buyer in this market, it might not a good time to get in to it. Stay away from Markets. Be careful with investments.

Banks in the biggest emerging markets are losing the confidence of investors as loans turn sour after a two-year credit binge.

Brazil's financial shares have lost more this year than counterparts in crisis-stricken Europe as consumer defaults hit a 12-month high in June and borrowing costs climbed to 46 percent. Bank stocks in China are trading at lower valuations than global emerging-market indexes for the first time since 2006. The country faces a financial crisis with bad debt that may jump to 30 percent of total loans, Fitch Ratings said.

In India, the cost of insuring banks against default has climbed to the highest level in a year. Loan-loss provisions at State Bank of India (SBIN), the nation's largest lender, rose 77 percent in the first three months of 2011, while net income fell 99 percent.

"People are beginning to smell the credit cycle turning," Michael Shaoul, chairman of Marketfield Asset Management and chief executive officer of New York-based brokerage Oscar Gruss & Son, said in an interview. "Credit cycles have tremendous momentum, and whenever they turn you want to pay attention," said Shaoul, who recommends selling high-yield bonds in emerging markets and betting on further losses in bank shares.

Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery and turned emerging-market banks into some of the world's biggest companies by market value. Now increased debt burdens threaten growth as central banks raise interest rates to fight inflation, U.S. hiring stalls and Europe deepens austerity measures. China and Brazil may see expansion cut by at least 50 percent in the next few years, according to economic consulting firms A. Gary Shilling & Co. and Capital Economics Ltd.

Citigroup, HSBC

A slowdown would curb profits at global banks including New York-based Citigroup Inc. (C) and London-based HSBC Holdings Plc (HSBA), which boosted lending in the fastest-expanding economies to fuel growth after the U.S. credit bubble burst in 2008. Prices of commodities such as copper are vulnerable to a drop in demand from China, the world's biggest consumer of the metal, said Gary Shilling, who founded the Springfield, New Jersey-based firm bearing his name and predicted the U.S. recession that began in December 2007.

"China isn't this juggernaut that's going to grow forever without any interruption," Shilling said in a July 14 interview with Bloomberg Television's Betty Liu, adding that the government may be forced to bail out banks as bad debts grow.

China Loan Surge

Chinese lenders expanded credit at a record pace in 2009 and 2010, making more than 17.5 trillion yuan ($2.7 trillion) of new loans as the government moved to offset a collapse in exports during the global recession. The surge in loans exceeded credit expansions in the U.S. before its financial crisis, in Japan before its stock and property bubbles collapsed in 1990 and in South Korea before the Asian financial crisis of the late 1990s, according to Fitch.

Brazil's annual credit-growth rate accelerated to as high as 34 percent in September 2008, the fastest since at least 1995, before moderating. The pace has picked up again, exceeding 19 percent for 11 months through June, central bank data show.

Andreia de Matos Esmeraldo, a babysitter and housecleaner in Rio de Janeiro, is one of the reasons. The 43-year-old resident of Rocinha, Rio's biggest slum, carries her HSBC credit-card statement in her purse as a reminder that using the card to purchase clothes and shoes isn't free. The bill shows an annual interest rate of 456 percent on 3,000 reais ($1,936) of debt she ran up that she has agreed to pay off in installments.

'Love to Shop'

"I love to shop, it gives me this personal satisfaction," Esmeraldo, who also sells products for Natura Cosmeticos SA (NATU3), Brazil's largest cosmetics company, said in an interview. "But two days later I feel sick because I have to pay it back."

Credit is expanding in developing nations after a decade of relative economic stability. Brazil has experienced boom-and- bust cycles of inflation, currency devaluations and interest- rate swings since the end of military government in 1985. Almost half of Chinese bank loans turned sour following the Asian financial crisis, while hundreds of Russian banks were shut when the government defaulted on $40 billion of ruble debt in 1998.

Most governments in the largest emerging markets are now strong enough to prevent an increase in bad debt from hobbling their banking systems, Amer Bisat, a former senior economist at the International Monetary Fund who manages money at hedge fund Traxis Partners LP in New York, said in a phone interview.

'Cushion of Savings'

China has $3.2 trillion of foreign-exchange reserves, the world's largest holdings. Brazil, India and Russia control a combined stash of about $1 trillion. The average debt burden in the four largest emerging economies, known as the BRICs after Goldman Sachs Group Inc. coined the term in 2001, is 40 percent of gross domestic product, compared with 102 percent for developed nations, according to IMF estimates.

"So long as the economy continues to grow at trend, the system can take a significant amount of banking problems," Bisat said. "The cushion of savings through reserves is so big that a lot of problems can be absorbed."

Surging profits during the past two years boosted the capital cushion of developing-nation banks. Lenders in the MSCI BRIC Index have an average Tier 1 capital ratio of 11.1 percent, up from 10.3 percent in 2009, according to data compiled by Bloomberg. That compares with the 11.8 percent average for banks in the MSCI World (MXWO) Index for developed countries. Banco Bradesco SA (BBDC4), Brazil's second-largest lender by market value, has a Tier 1 ratio of 14.7 percent, data compiled by Bloomberg show.

Capital Requirements

"Brazilian banks are well-capitalized," Will Landers, who runs Latin America equity funds for BlackRock Inc., the world's largest money manager, said in a July 5 interview on Bloomberg Television. "We're really not worried about any type of banking crisis."

Policy makers have already taken steps to slow credit growth. Brazil raised reserve and capital requirements on some loans in December, doubled to 3 percent a tax on consumer credit in April and required banks to hold more capital against certain credit-card loans last month. The Reserve Bank of India has asked lenders to set aside more cash for bad loans and double provisions for restructured debt.

China raised banks' reserve requirements 12 times since the beginning of 2010. The China Banking Regulatory Commission told lenders last month that they haven't set aside sufficient funds to cover losses on loans to local governments and ordered them to accelerate debt collection, a person with knowledge of the matter said.

Struggle to Grow

"China as a country has the capacity to be able to absorb" increased defaults, Piyush Gupta, CEO of Singapore- based DBS Group Holdings Ltd., southeast Asia's largest bank, said in a July 19 interview on Bloomberg Television.

China's leaders maintained economic growth of at least 7.6 percent in the late 1990s even after bad debt jumped to more than 40 percent of total loans, according to data compiled by Bloomberg and "Red Capitalism" authors Carl E. Walter and Fraser J.T. Howie.

This time around emerging countries may struggle to grow out of their debt problems because demand from the U.S. and Europe is slowing, said Richard Duncan, a partner at Singapore- based Blackhorse Asset Management who was a consultant to the IMF during the Asian financial crisis and has worked for the World Bank as a financial-industry specialist.

The U.S. jobless rate climbed for a third straight month in June to 9.2 percent. Retail sales in Europe, where policy makers are struggling to solve sovereign debt crises in member countries including Greece and Portugal, sank 1.1 percent in May for the biggest decline since April 2010.

'Excess Capacity'

In the past, emerging countries' export growth "helped them overcome a lot of bad mistakes in the banking sector," Duncan, the author of "The Corruption of Capitalism," said in a phone interview. Now in China, "they have massive excess capacity, which they financed with credit, and no one to sell the capacity to," Duncan said.

China's local governments, which the National Audit Office estimates have 10.7 trillion yuan of debt, are struggling to repay their obligations after the People's Bank of China lifted its main lending rate five times since October 2010. About a third of local government financing vehicles, used to get around laws prohibiting direct borrowing, don't have cash flow to service their debt, according to China's banking regulator.

Yichun City Construction Investment & Development Co., an investment vehicle for the city of about 1.3 million people near China's border with Russia, sold 1.2 billion yuan of bonds in 2009 backed only by a pledge from the local government and possible future land sales.

Warrior Princesses

Money raised from the sale is being used for the destruction of what the prospectus calls "shanty towns." Single-floor traditional wooden homes in the valley are being demolished to make way for thousands of low-income apartments.

The company has also financed a new reservoir, an airport terminal and parklands, one featuring faux Corinthian columns topped by winged warrior princesses and bronze sculptures of chariot-riding gods. The Yichun financing vehicle would have lost money every year from 2006 to 2008 except for direct government subsidies.

Fitch cited financing vehicles and property-related lending as primary areas of concern when it said in April it may cut the country's local-currency debt rating. China has the worst grade in Fitch's three-level scale of potential for systemic stress. Sixty percent of countries that received the score had banking crises within a few years, according to a June 21 presentation by the ratings company.

Cutting Estimates

An increase in Chinese banks' bad-debt ratio to 30 percent is "not inconceivable," Andrew Colquhoun, head of Fitch's Asia-Pacific sovereign debt unit, said on an April 13 conference call. Moody's Investors Service estimates nonperforming loans may climb as high as 18 percent in a "stress" case, according to a July 5 statement. China's total bad loan ratio was 1.1 percent at the end of 2010, according to the central bank.

Investors are cutting their estimates for the value of Chinese bank assets. The MSCI China Financials Index's price-to- book ratio, a measure of share prices relative to net assets, has tumbled to 1.8, the lowest level since February 2009, from 2.8 two years ago, according to monthly data compiled by Bloomberg. The ratio for Chinese lenders slipped below that of the MSCI Emerging Markets Index on June 21 for the first time since January 2006, data compiled by Bloomberg show.

Industrial & Commercial Bank of China (601398) Ltd., the world's largest lender by market value, slumped 8.2 percent since the end of March even after saying bad loans dropped almost 4 percent in the first quarter.

'Increasingly Tangible'

Credit-default swaps on Bank of China Ltd. (3988), the nation's third-largest lender by assets, jumped to 153 basis points from 106 on March 31, according to data compiled by Bloomberg and CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.

"We expect Chinese banks' nonperforming loans to rise noticeably over the next few years," Liao Qiang, a director at Standard & Poor's in Beijing, said in an e-mailed response to questions on July 21. "This could be increasingly tangible as policy tightening continues."

Brazil's biggest lender, Itau Unibanco Holding SA (ITUB4), raised its default-rate forecast for 2011 to between 4.5 percent and 4.6 percent on July 11. The Sao Paulo-based bank had forecast a rate of 4.2 percent to 4.5 percent. Itau's shares have tumbled 21 percent this year, helping to drag down the MSCI Brazil Financials Index by 19 percent in local currency terms. That compares with a 12 percent retreat in Europe's Stoxx 600 Banks Index and a 7.3 percent drop in the S&P 500 Financials Index. (S5FINL)

Brazilians' Burden

Credit Suisse Group AG lowered its rating of Itau on July 26 to "neutral" from "outperform" and cut its earnings forecasts for Brazilian banks by an average of 4 percent this year on concern that higher provisioning costs will crimp industry profits.

Brazilians' debt burdens are rising after the central bank lifted its benchmark interest rate five times this year to the highest level since March 2009. The average interest rate on consumer loans was 46.1 percent in June, up from 40.6 percent in December, according to the central bank. The average rate on company loans increased to 30.8 percent from 27.9 percent.

Loan payments by Brazilian consumers climbed to 26 percent of disposable income in March, up from 24 percent a year earlier. The rising costs of debt signals Brazil's consumers are "overstretched," Neil Shearing, a senior emerging-markets economist at Capital Economics in London, wrote in a July 12 report.

'Lower Echelon'

A retrenchment may drag down Brazil's economic growth rate to 2.5 percent in 2013, from 7.6 percent last year, according to Shearing. That compares with the 4.5 percent median forecast in a Bloomberg News survey.

"The people doing the borrowing are the people in the lower echelon in terms of income, and that's worrisome," Simon Nocera, a co-founder of San Francisco-based hedge fund Lumen Advisors LLC and a former economist at the IMF, said in an interview. Nonperforming loans "will be higher than previous credit cycles."

Borrowing costs for Brazil's mid-sized banks are climbing amid speculation that loan losses will increase. Yields on Banco Bonsucesso SA's dollar bonds due in 2020 rose 85 basis points this year to 10.6 percent after Moody's cut its outlook in December for lenders specializing in payroll-deductible loans, which are deducted directly from workers' salaries.

Banco Panamericano SA (BPNM4), which was bailed out with a 2.5 billion-real loan from its controlling shareholder in November after suspected accounting fraud, increased its assets to $8.1 billion as of September from $4.4 billion two years earlier, data compiled by Bloomberg show. Banco Cruzeiro do Sul SA, which focuses on payroll-deductible loans, has seen its assets rise to $7.2 billion from $2.7 billion during the past three years, the data show.

'New Reality'

"Banks will have to face a new reality," Brigitte Posch, emerging-markets portfolio manager at Pacific Investment Management Co., which oversees about $1.3 trillion worldwide, said at the Bloomberg Brazil conference in New York on July 14. "That will affect the relative value of those bonds, and we don't think it's the right moment to invest in the mid-sized banks sector in Brazil."

In India, debt ratings for companies are deteriorating at the fastest pace since 2009 as slower economic growth and 11 interest-rate increases by the central bank since March 2010 heighten the risk of defaults. ICRA Ltd., the local unit of Moody's, lowered rankings for 34 borrowers last quarter, according to data compiled by Bloomberg.

Stress Tests

Indian lenders' nonperforming assets may rise 25 percent in the year ending March 31, 2012, to 2.92 percent, the central bank said on June 14 after conducting stress tests. The Indian banking system is under pressure and higher provisioning is "imminent" if regulators want to control asset quality, Diwakar Gupta, Mumbai-based managing director and chief financial officer of State Bank of India, said on July 2.

Bad loans "are going to rise because we will have to pass on the rate increase," the bank's chairman, Pratip Chaudhuri, told reporters in Mumbai after the central bank increased borrowing costs on July 26. "Interest-rate sensitive sectors like real estate and education loans will most definitely be affected," Chaudhuri said.

Ghanshyam Kulwal, 46, an exporter of towels and sheets in Mumbai, is feeling the squeeze. He bought a two-bedroom apartment in the suburb of Kandivali in 2003 for his wife and two children, taking a loan from what was then ABN Amro Bank NV at a floating rate of 6 percent. Today he's paying 12.5 percent.

"The government's one-point agenda to check inflation by raising rates has led to common people like me suffering a lot," Kulwal said.

ICICI Swaps

The cost of insuring State Bank of India's bonds against non-payment with five-year credit-default swaps increased as much as 48 basis points this year to 208 on July 18, the highest since July 2010, according to CMA. Swaps for ICICI Bank Ltd., the second-biggest Indian lender, jumped by as much as 54 basis points to a 12-month high of 253 on July 19.

"Whenever you have a period of high growth and the macroeconomic picture changes, there will always be an issue" with credit quality, said Sampath Kumar, an analyst at brokerage India Infoline Ltd. in Mumbai.

Lenders in other emerging economies are also showing signs of stress. Bank of Moscow needed the biggest bailout in Russian history last month after racking up at least 150 billion rubles ($5.4 billion) of unsecured bad loans. The $14 billion rescue of the country's fifth-largest bank signaled Russian lenders' health may be "substantially worse" than most investors judge, Carroll Colley, a director at New York-based research firm Eurasia Group, wrote in a July 8 report.

Turkish Boom

Russian lenders accounting for 51 percent of the banking system's assets failed central bank stress tests this year. Losses in the stress scenario may amount to 5.2 percent of gross domestic product, Bank Rossii said in an April report.

In Turkey, annual credit growth of more than 30 percent has fueled a boom in domestic demand that widened the country's 12- month current-account deficit to a record $68.2 billion in May. The combination of loose credit and a growing trade gap makes Turkey's financial system vulnerable to a drop in risk appetite, according to Shaoul, whose $741 million Marketfield Fund has climbed 7.3 percent during the past year, beating 66 percent of peers, according to data compiled by Bloomberg.

Banco Santander

Souring loans in emerging markets could affect global banks. Banco Santander SA (SAN) shares sank 3.2 percent on July 27 after Spain's biggest lender reported a 32 percent surge in loan-loss provisions in Brazil, an increase that surprised investors, according to Daragh Quinn, an analyst at Nomura International in Madrid.

Citigroup, the third-largest U.S. bank, gets more than half of its profit from emerging markets, CEO Vikram Pandit, 54, said in March. Consumer lending in Asia jumped 41 percent in the two years through June to $66.7 billion, as deposits rose 27.7 percent. In India, Pandit's native country, the bank boosted lending to corporate clients by 33 percent in the year ended March 31. Loans to small and medium enterprises jumped 35 percent, according to a company statement.

While second-quarter revenue from its consumer bank's Latin American and Asian units rose a combined 13 percent to $4.46 billion, profit fell 14 percent.

"They will have to rein in what has obviously been a real surge in consumer lending," said Richard Staite, a London-based analyst with Atlantic Equities, who has an "overweight" rating on Citigroup shares. "Investors will want reassurance going forward about the level of credit quality."

'Well-Balanced'

Citigroup has a "well-balanced, focused growth strategy in the emerging markets," Jon Diat, a New York-based spokesman, said in an e-mailed statement. "In India and Brazil, Citi has a very focused consumer strategy that targets the most creditworthy clients, and our corporate business works closely with top-tier local corporate and multinational entities."

Second-quarter earnings reports may provide more clues on the outlook for nonperforming loans and bank earnings in emerging markets. At least 126 companies in the MSCI Emerging Markets Financials Index are scheduled to report results in the next 30 days, according to data compiled by Bloomberg. Last quarter, profits missed analysts' estimates by 3 percent on average, the data show.

"We are only at the beginning," said Mohamed Abdel-Hadi, whose HC GEM Sector Rotation Fund has climbed 7.4 percent this year, beating 86 percent of peers, in part because of bets that financial stocks would underperform. "Over the next few quarters, we expect to see NPLs rising across emerging-market banks."