The CHINDIANS – Reshaping the future of the global economy

Posted on April 22, 2011. Filed under: Uncategorized | Tags: , , , , , , , , , , , |

Indo-China Trade has been growing at over five times the rate of world trade growth. Going forward their increasing economic strength and bilateral trade will create a super growth corridor where the world could plug in.

China and India are now leading economic stories on the world stage and this story may very well last through most of our life time.  And while some in the market regard the two countries as competitors in the years to come collaboration and not competition will take the centre stage. India and China’s trade relationship is historic going back 2,000 years under the thriving Silk Road trade. Relationship between the two countries has been thorny in the past and they did go to war over a border issue in the Himalayan region in 1962 which affected the trade and bilateral relationship negatively.

However from the 2002 onwards when the two countries agreed to work on normalising the relationship and spurring commerce, the bilateral trade between the two has steadily grown from a mere US$ 7.3 billion in 2003 to around US $ 62 billion in 2010 growing by more than 8.4 times in just 7 years at an annual growth rate of over 120% making China the leading trading partner of India, and India jumping 11 places from 20th top trading partners of China in 2003 to be ranked 9th among China’s leading partners in 2010. The two countries have already agreed to push the bilateral trade to USD 100 billion mark by 2015. Although China’s bilateral trade volume with ASEAN, Japan and South Korea is higher the annual growth rate of the INDO-CHINA bilateral trade is far greater and is set to continue as business to business contacts grow. Also the size of the economy, population and the geographic closeness of the two countries provide abundant opportunities for growth in bilateral trade.

Today a significant portion of the world trade growth is coming from China and India. And this trend is set to continue going forward. Intra – Asian trade has clearly been one of the biggest beneficiaries of the growth. According to IMF the interregional trade flows within Asia has grown at the rate of over 13.4% from 2000 to 2009 and is estimated to be valued at just over US 1 trillion. So far China has been the major driving force behind the interregional trade growth. And a noticeable change in pattern has been the increase in imports from Asia to meet the domestic demand coming from Chinese consumers whereas previously a bulk of the imports from parts of Asia were assembled in China and re-exported to the developed markets. The pickup in domestic demand is line with the government’s attempt to rebalance the Chinese economy. In its recent 12th five-year plan Beijing has set out a clear plan and set of measures to rebalance the economy and drive up domestic consumption.

The Government in China has realized that a vibrant domestic market is the only guarantee of a sustainable growth and long term success and relying heavily on foreign demand makes the country vulnerable to external shocks . So expanding domestic consumption is clearly a favoured long-term strategy for Beijing especially when its export based manufacturing seems to be slowing down and gradually may lose competitiveness mostly driven by rapidly rising high wages, higher input cost, shortage of low-skilled workers among others. Various projections suggest that the working age population in China will peak around 2015, so the labor supply is going to gradually decline and push up the wages even higher.

Historically wage growth and household income in China have not matched the overall GDP growth and some research suggests that in fact wages have actually fallen from 53.2% of gross domestic product between 1992 and 1999 to 49.7% between 2000 and 2008. So in its efforts to rebalance the economy the government has taken measures to allow significant rise in wages across the board. In line with government policy the municipalities across China have raised the minimum wage on average by over 20%.

Rising wage pressure, appreciating currency and high input cost driven by inflation may be enough to shut down a significant number of export houses in China especially in the low manufacturing sector where exporters’ average margin is around 3% or less.

Going forward the government in China will have to look at creating policies that will allow private sector to play a bigger role and drive the domestic demand. Having that said it is worth noting that since 1999, the share of State owned Enterprise (SOEs) has declined from 37 percent to less than 5 percent in terms of numbers, and from 68 percent to 44 percent in terms of assets as a result of the SOE reforms carried out in the past under “grasping the big, letting go of the small” strategy. That said still a huge portion of the Chinese economy ( in terms of GDP ) is under government control and it has been the major driving force behind the overall GDP growth whereas the private sector has been driving India’s growth.

 It is estimated that over 80% of the Indian economy is now in private hands and the private sectors is driving the investments story in the country. Private sector in India has benefitted hugely from the Indian growth and has accumulated significant wealth. It is estimated that the combined total assets of India’s wealthy is set to reach around US $ 6.4 trillion( the highest in Asia ) over the next 4-5 years.

India’s demographic profile is very attractive with a strong pool of young population adding to the workforce every year but it must be said that a good percentage of them may not be employable. So the government needs to reform its education sector and also increase the number of good universities and colleges across the country. One way to do it will be to encourage established foreign education institutions to set up campuses in India alongside or in partnership with the local universities and colleges.

As the Indian economy grows it is estimated that around 200-250 million people may be added to the consuming class in the next 7 to 10 years. This presents a huge opportunity to both domestic and foreign companies within Asia and other parts of the world.

 In the short to medium term China will still be at the centre stage like the sun in the solar system driving the interregional growth in Asia and parts of emerging markets. Having said that India’s share is gradually increasing and so is its annual growth rate. It is worth noting that India’s annual GDP growth rate for 2010 was slightly above China according to the recent IMF publications. This does not mean that India will anytime soon match China’s economy in terms of the overall GDP ranking. But both the countries are expected to be major driver of growth for the region and other emerging market economies. Based on this assessment the Intra-Asian trade flow is estimated to grow at an average rate of over 12% year-on-year until 2020 (according to HSBC and Asian Development Bank ) and the series of bilateral free-trade agreements signed recently by both China and India with others Asian countries will significantly boost the regional trade flows. 

However it must be said that said both the countries do face significant challenges going forward. There are some concerns that the Chinese economy is overheating and the increased investments in fixed assets especially infrastructure and real estate which shows no visible signs of slowing down in spite of the tightening measures will hinder the real and required rebalancing of the economy.  The latest Q1 GDP print for 2011 show the economy grew at 9.7% year-on-year which exceeds market expectation and also defy concerns about any slowdown in growth.

Some commentators have also suggested that China’s growth story resembles Japan in the 1980’s and ultimately like Japan the bubble will burst and the country will hit a wall. It is worth pointing out that most of the bold forecasts about China have turned out to be wrong. The funny thing about forecasting and making predictions is if you make enough of them on a regular basis there is a good probability that you may get some right eventually. And with the right marketing skills and a bit of luck you could turn yourself into a market GURU.

Due to its growing economic influence China does attract a lot of attention and there are many economic theories around China. It is worth noting that although China is the world’s second largest economy it still has a very high income disparity and a low per capita income. And unlike Japan in 1980’s the country is still a developing economy and has a decade or more of growth left in the tank. Chinese growth story today resonate more with the U.S. story in the early 1900s when the U.S. went through numerous boom and bust but each time the economy recovered and got bigger.

The market expects the government in Beijing to fast track the implementation of policies that drives up the house hold income in real terms; increase the role played by private sector, and incentivise domestic consumptions among others. Also currency appreciation and a collaborative approach to guard against commodity and oil & gas price volatility may be a useful method to fight against inflation driven by external factors.

The previous strategy under which Beijing encouraged its State owned Enterprise ( SOEs ) to acquire mineral & mining resource assets including Oil & Gas overseas to secure price stability and supply didn’t really deliver the desired result. While state owned enterprise (SOEs) profited from the government’s “equity oil “ strategy  the Chinese consumers and the policy makers didn’t see any real reward. And in the current political turmoil in the middle-east Beijing may have to re-visit the existing strategy and look at ways to increase global co-operation with other resources (including Oil & Gas) dependant countries to create a collective game plan for guarding against supply disruption and greater price stability.

Having said that commodities and oil & gas prices will remain vulnerable to speculation and a significant percentage of the pricing input and price movement of commodities including of OIL & GAS is based on speculation. It is worth noting that the world is not constant but changing where a useless commodity can become relevant overnight driven by innovation and technology. For example Crude Oil was once a useless commodity that became valuable overnight.  Also Bolivia’s Lithium reserves – Lithium is used for the production of batteries and was once considered useless but it is extremely valuable these days and with the explosive growth in hybrid and electric cars the demand is outstripping the supply on a daily basis. So all of a sudden Bolivia is becoming very important in the whole scheme of things. It must be said that evolution, innovation and technological advances are key to sustainability and survival. The saying “Necessity is the MOTHER OF INVENTION “clearly holds TRUE.

India and China together is home to over 2.5 billion people so food and energy security will always be at the forefront of government’s policy. And in line with this policy both India and China have allowed home grown companies to expand capacity by acquiring assets in other emerging markets. Indian Agro companies have acquired and leased various agricultural assets including of farming lands in Argentina, Brazil, Mexico and parts of Africa. India’s agriculture sector is need of serious investments and structural reform including improving farming methods in order to increase its productivity.

China has 10% less arable land than India yet its agricultural production is 25% higher. Also China implemented land reforms in the early fifties which resulted in enhanced agricultural output, establishment of agro industries whereas with the exception of some states land reforms were mostly half measures in India. Bad policies decisions further deepened the crisis and as a result thousands of farmers are committing suicides every year across the country. Having said that private sector in India is making serious investment in the agro based industry and some of them bearing fruits. Going forward the government and the private sector in India will need to work together to boost investments in agro infrastructure as well as upgrading of existing distribution system, irrigation, farming methods and technology.  New Delhi will have to look at liberalizing R&D in agriculture sector, create policies to encourage investments in the agro sector of the economy and this will have to include the much needed land reforms.

China’s ambitious development goals are an official target of reaching a 95 percent grain self-sufficiency rate. This policy is a pillar to establishing the country’s food security, and result in an increase in domestic fertilizer consumption. According to the governments figures China’s national grain consumption will reach 572.5 million tons around 2020, requiring an increase of around 50 million tons in domestic fertilizer production over the next 10 years.  In order to achieve these targets, the government has made clear that it plans to boost investment in agro infrastructure also upgrade existing technologies in irrigation systems as well as seedlings, while improving farming methods and increasing the level mechanisation in the sector.

While both India and China search for a more competent, healthier and sustainable way to develop their economy. They do face similar challenges and one of them is to find a growth model that is inclusive and able to deal with growing income inequality which could potentially create social unrest going forward.

The two great civilizations of the past are finding their way back to the world centre stage as economic powers and in the process reshaping the future of the global economy. Both countries can learn a lot from each other and through collaboration create limitless growth opportunities.

A combined population of 2.5 billion presents a huge market full of abundant opportunities that has a potential of creating a super- highway for growth. And linking to a super growth corridor will allow other countries especially the emerging economies to increase their growth speed limits significantly.  So there is a strong case for companies and economies to have a China- India strategy (aka CHINDIA ) rather than a strategy that focuses only on China or India.

 

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