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comparative economic performance
Fine china and Indian tea
The Lex Column, FT Syndication Service
12/30/2005
Thanks top eye-popping revisions, few economies can claim a better year than China. A sweeping census uncovered an additional $278bn of gross domestic product (GDP), vaulting China over old-world stalwarts Italy, France and probably the UK to become the fourth-biggest economy.
Bigger, alas, is not necessarily better. While not the central case, the possibility of a marked slowdown persists. November exports and retail sales growth showed signs of softening and inventories are reported to be rising. The peak of the business cycle seems to have passed. Even adjusting for the large upward revision to output, which comes largely from the less capital-intensive services sector, China's investment ratio is probably still about 40 per cent of GDP. This investment is frequently unproductive. This year in the steel industry, for example, when most countries cut production, China increased output by a quarter and had to slash prices as a result.
Perennial worries of over-investment aside, China faces several challenges. The first is its currency. July's modest 2.0 per cent revaluation was only a temporary sop to international pressure for currency appreciation. Domestic pressure, though, is minimal; indeed, dollar strength means the remninbi has appreciated against regional peers. Certainly, China has little to fear from inflation. If anything, next year's worry is the reverse; prices are heading down. China has a structural bent towards deflation, given over-capacity in manufactured goods and a huge labour pool. Beijing would struggle to tackle deflation, since real interest rates are low and government spending is relatively high. Standard & Poor's puts government debt, including contingent liabilities, at 150 per cent of GDP. The final risk lies in the social fabric. Beijing's economic and political model demands social stability. But rising awareness of inequalities and government incompetence is fuelling a small but intensifying backlash. China's growing pains are unlikely to abate soon.
Chinese stocks: Investors may be forgiven a wry smile as they usher in the year of the dog next month. Many have already been through the dog years: $100 invested in Shanghai A-shares four and a half years ago is worth just $49 today. All told, tradeable shares listed on China's two stock exchanges are worth about $130bn -- or $50bn less than Toyota, the Japanese carmaker.
Notwithstanding a virtual freeze on flotations, China's domestic currency A-shares fell 8.5 per cent this year. Beijing's grand plan to dismantle massive non-tradeable shareholdings, which are mainly held by the state, makes sense. However, ultimately that means unleashing roughly $250bn of stock into a market half that size. The plan is ambitious. It will take years, or even decades, for the state to exit -- its control of the stock market is likely to remain a constraint for some time. The universe of listed companies is poor, as is their profitability. Even state officials admit that up to two-thirds of the companies should never have been listed -- but weeding out that many now would cause havoc among retail shareholders. That said, investors can take heart from moves that will improve liquidity and, ultimately, management performance.
The pool of assets investing in China is swelling. Local fund managers are reckoned to have $62bn of assets under management and the corporate pension industry is forecast to grow by $12bn a year. Foreigners are also hungry for China stock, due to the growing ranks of dedicated funds. India: Is India the new China? The world's second-most-populous nation has adopted a different economic model from that of its bigger neighbour but, at least for the moment, growth trends are moving closer. India's economy is expected to grow 7.5 per cent this year, compared with China's 9.0-9.5 per cent. Further out, India's prime minister is shooting for 10 per cent. Better still -- and in sharp contrast to China -- India has converted economic growth into investment returns: witness this year's 38 per cent surge in the Sensex stock exchange index.
Nonetheless, there will be more challenges next year. Growing inflationary pressures and the widening trade deficit point to currency strains and further interest rate rises, which could in turn hurt consumption. There is less slack -- be it a skilled labour pool or excess capacity -- to absorb inflation. India is still largely off the map for big manufacturing foreign direct investment (FDI). It struggles to include farmers, who often do not have the necessary skills, in the new, booming, services economy.
India lacks the basic infrastructure to support Chinese-style growth rates. It spends just 3.5 per cent of GDP on infrastructure, a third of China's level. Drewry Shipping Consultants estimates India loses out on an additional 1.0-2.0 per cent of GDP a year due to poor transport infrastructure alone. India's coalition politics makes it hard for the government to formulate and execute policy on infrastructure, as decisions get snarled up in lengthy debates, or are vetoed by communist allies.
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