World Markets Simplified

Remember all those daily rumors (prmarily courtesy of the FT) that either China, or Japan, or Europe itself would bailout Europe (yeah, don't ask). Well we can put them all to rest…for at least a few more hours. Because in the battle of inverse counter disinformation, it is important to refute the rumors you yourself have created just so next time the same rumor is spread it has some impact…. Unfortunately said impact will be less, much less, with every single iteration, until just like central bank intervention, its impact is lost in the noise. Per Businessweek: "Officials from China and Japan, the world's second- and third-biggest economies, indicated that their support for Europe will have limits and the region needs to solve its own debt crisis.Japanese Finance Jun Azumi said in Washington today that while his nation can buy European Financial Stability Facility bonds if needed, there is no blank check. "At the margin we can do quite a bit to help," Chinese central bank Deputy Governor Yi Gang said in a panel discussion yesterday at the International Monetary Fund in the same city. At the same time, "the real solution of the European sovereign debt crisis has to be done by Europeans themselves." Good luck in that whole Europeans coming up with a solution: after all it was mere hours ago that France's Baroin said that the Eurozone is "open to support from others." Translation: "Show us the money." In other news, the countdown for the latest European bailout rumors from the FT is now on.

More:

Group of 20 finance chiefs today pledged coordinated efforts to tackle rising risks as Greece teeters on the brink of default and stocks plunge around the world. Weak growth, high unemployment, sovereign stresses and turbulence in financial markets are "renewed challenges facing the global economy," the officials said.

Azumi said that euro-area nations had "said that this is a euro-area problem, and that the euro-area nations should be the ones to solve the problem." "We don't reject that view, we respect it," he said.

Yi Gang's remarks came amid investors' expectations that China may help stabilize the euro region, after Italy this month followed Spain, Portugal and Greece in seeking investment from the world's fastest-growing major economy. Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled this month developed nations should cut deficits and open markets rather than rely on China to bail out the world economy.

Also this month, other Chinese officials indicated the country is prepared to offer assistance. Zhang Xiaoqiang, vice chairman of China's top economic planning agency, said the nation is willing to buy euro bonds from countries involved in the sovereign debt crisis "within its capacity."

In the panel discussion yesterday, Yi said his nation's involvement could be at the country level or with the European Union, and could also extend to cooperation with the IMF.

As to why we are sometimes baffled by why everyone automatically assumes the Chinese are ultra clever:

It is unlikely that the global economy will slide into another slump, in part because "the whole world is still at a very low level" of activity, Yi said. "We have a very moderate recovery" following the financial crisis, which indicates global growth "won't decrease too much," he said.

"The probability of that is still rather limited," Yi said, referring to a double-dip recession. With the right combination of policies, countries can manage the debt crisis and "we can still have moderate growth" in the global economy, he said.

Steve Mandel's hedge fund Lone Pine Capital says there are major concerns for global financial markets going forward. In their second quarter letter to investors, Lone Pine identifies two major concerns: the Euro and China's bad debt:

"The European Union (EU) is a structurally flawed concept and the euro is therefore doomed. This is a trickier issue because of the absence of a currency depreciation "escape valve", the vastly different fiscal condition of individual EU members (the structural flaws), the scale of public and private sector indebtedness and therefore even more convoluted politics. The consequences of failure are so high for all concerned, though, that compromises most likely will be made to preserve the EU and the euro. These will almost certainly involve financial pain on the part of France and, particularly, Germany (and, of course, the countries with shaky credit). In addition, a long and protracted road to financial health will require patience from the electorates in both creditor and debtor nations.

China has massive amounts of unrecognized bad debt that will ultimately lead to a crisis. While Chinese banks (and non-bank lending) are opaque, the high level of central government reserves and the absence of external sovereign debt make the odds of a financial crisis very low. There will undoubtedly be high profile frauds, scandals and bankruptcies, but for these to snowball into a systemic problem is unlikely. In a country with a closed capital account, though, one side effect is inflation. This has the potential to harm the "social contract" with the populace, an outcome which must be closely monitored."

Their point on China is not the first time we've heard this cautious approach. Grandmaster Capital's Patrick Wolff has called China a debt-fueled investment bubble. Kleinheinz Capital also believes that inflation is the biggest threat to emerging markets. And lastly, hedge fund manager Jonathan Ruffer also put out commentary that he'sworried about China.

But at the same time, there are other prominent investment managers that take the other side of the argument. We've covered previously how Maverick Capital is focused on China's importance and how Warren Buffett has said China will be a big driver of growth for the next 10-20 years. At the Delivering Alpha Conference, Xerion fund's Dan Arbess debated against Kynikos Associates' Jim Chanos as to whether China is a bubble or bonanza.

While big names stand on either side of the argument, only time will tell who is ultimately proven correct.

The CBI has almost finished investigations against former director general of Hydrocarbons (DGH) V K Sibal and Mukesh Ambani-led Reliance Industries Limited (RIL) in the KG Basin contract case and FIRs are likely to be registered soon. A senior CBI official told TOI, "We have found complicity of Sibal with RIL." Officials said Sibal and some Reliance officials would be formally questioned now. 

The allegations against Sibal in one of the PEs is that he favoured RIL and approved an increase in capital expenditure from $2.4 billion to $8.8 billion for KG D6 field between September and December 2006 for which he got personal favours from RIL. "We have almost finished the enquiries. The final go-ahead would be given by top brass after which regular case would be registered," said a source. 

Three PEs were registered against Sibal a few months ago out of which one was turned into a regular case in the first week of July. In the first case, Sibal allegedly favoured a US-based oil exploration company – GX Technology – by escalating the cost which caused a loss of Rs 400 crore to the exchequer. The agency is preparing to send a letter rogatory to US to get more information about GX Technology. After registering the first case, CBI had raided Sibal's residence and documents related to the case were recovered, said sources. The raids were conducted in Noida, Delhi, Dehradun and Mumbai. 

Apart from Sibal, the other accused in the first case are ex-chief geologist D K Rawat; then adviser – geophysics S K Jain, former accounts department head K A Murli, then adviser (contracts) Anurit Sahi, ex-finance manager TSLN Reddy, then chief chemist Savendra Gupta, GX Technology and the company's manager of exploration Sujata Subramaniam