Eco­nomic prospects for China, In­dia and ASEAN: A Round­table

Norway-Asia Business Review - - News - By Eric Baker

Econ­o­mists and an­a­lysts took aim at the big eco­nomic trends in Asia at the Nor­way-Asia Busi­ness Sum­mit in In­dia in April, with a few com­ing to quite dif­fer­ent con­clu­sions, es­pe­cially about the out­look for China.

Sharmila Whe­lan, the deputy chief econ­o­mist with Asia­nomics, was down­beat on sev­eral coun­tries.

“We are very bear­ish on the global out­look, de­spite the quan­ti­ta­tive eas­ing in Ja­pan,” she said. “The US is stuck in sec­ond gear and we pre­dict a GDP in­crease of only 2% as we don’t ex­pect a rate hike.” “Quan­ti­ta­tive eas­ing is not go­ing to work in Europe as the cor­po­rate and pri­vate sec­tor is delever­aged. In Ja­pan the most op­ti­mistic sce­nario is stag­na­tion as quan­ti­ta­tive eas­ing is not work­ing and the coun­try has seen the big­gest de­te­ri­o­ra­tion in real in­come since World War II. De­fla­tion is com­ing to Ja­pan. “In­dia’s de­mo­graph­ics are dif­fer­ent than China’s and the coun­try can­not

du­pli­cate that model” “Asian ex­ports have flat­lined since 2011 be­cause the de­mand en­vi­ron­ment is so weak. China is slow­ing as well as the prop­erty and man­u­fac­tur­ing sec­tors are too in­debted. This is the start of a delever­ag­ing pe­riod in China.” Here Ms Whe­lan made some waves at the con­fer­ence, an­nounc­ing her growth out­look for China by tak­ing a shot at the coun­try for fib­bing its GDP fig­ures.

“Asia­nomics pre­dicts China will have 3-5% eco­nomic growth this year, with 3% be­ing the most likely out­come,”

she said. “The lead­ers there have no in­ter­est in in­creas­ing credit again, so we don’t see an­other big stim­u­lus pack­age com­ing like last time. The Chi­nese gov­ern­ment fig­ures are not re­li­able, so we try to look at other num­bers, such as power con­sump­tion, the Pur­chas­ing Man­agers In­dex, Chi­nese im­ports from Tai­wan and South Korea. Th­ese num­bers don’t back up the growth fig­ures the gov­ern­ment has been pub­lish­ing the last few years, as man­u­fac­tur­ing is go­ing down. “While some feel this will cre­ate the im­pe­tus for stim­u­lus again in China, the sit­u­a­tion is dif­fer­ent this time around. The ser­vice sec­tor is boom­ing, ab­sorb­ing the losses from man­u­fac­tur­ing, and there isn’t the so­cial un­rest prob­lem there was in 2008. “There is a 20% chance of de­val­u­a­tion in China based on the ser­vice sec­tor not be­ing able to soak up the losses. The coun­try has a 56% fis­cal GDP to debt ra­tio and we be­lieve China is go­ing to bail out the lo­cal gov­ern­ments there. “Our big­gest over­weight fore­cast this year is for In­dia and the Philip­pines. In­dia is at the end of a four-year delever­ag­ing cy­cle and will start a multi-year in­vest­ment cy­cle. We be­lieve the ru­pee is un­der­val­ued by 8-10% and Prime Min­is­ter Modi will be able to get rid of some of the red tape de­lay­ing in­vest­ment.

“Hav­ing said that, for the next three to four years, ASEAN is where you want to be. They are build­ing fac­to­ries there and the re­gion should ben­e­fit from the down­turn in China. ASEAN was an ex­port-fo­cused re­gion only for decades, but it is start­ing to build a do­mes­tic story. It is no longer just the backyard of China. “You can see this story build­ing in ASEAN since 2009, as ev­ery mem­ber coun­try’s big­gest ex­port mar­ket is ASEAN. Al­most 60% of the re­gion’s ex­ports are stay­ing in ASEAN for fi­nal con­sump­tion. And the re­gion has not had an in­vest­ment cy­cle since 2007.” Ms Whe­lan’s re­marks caught the ire of Chris Ryn­ning, who was a pan­elist for a dif­fer­ent ses­sion at the sum­mit and writes a newsletter on China in ad­di­tion to his po­si­tions as chair­man of the Nor­we­gian Busi­ness As­so­ci­a­tion in Bei­jing and part­ner of Staur As­set Man­age­ment. In his newsletter, he pointed out that later the same month as the sum­mit, the Chi­nese gov­ern­ment did in­deed of­fer a stim­u­lus by re­duc­ing the re­serve re­quire­ment for banks, thus free­ing up liq­uid­ity for lend­ing. Mr Ryn­ning ac­knowl­edged there are hur­dles for the Chi­nese econ­omy, such as credit, de­faults, shadow bank­ing and the prop­erty mar­ket. But he in­sisted China needs more credit, not less, and credit has been ex­pand­ing for some time now. Mr Ryn­ning said so­cial fi­nanc­ing in the US is al­most nine times larger in ab­so­lute terms than it is in China, so the credit mar­ket in China needs to grow and be­come more so­phis­ti­cated. Vi­dar An­der­sen, man­ag­ing direc­tor and re­gional head of Asia for DNB Bank as well as an old hand in China, agreed with Ms Whe­lan that lit­eral growth fig­ures are too rel­a­tive.

“For ex­am­ple, in a mat­ter of a few months China’s econ­omy went from ‘over­heated’ to ‘ in trou­ble,’” he said. “So what is the proper level?”

“You have to put it in con­text. If China grows at 6-7% for the next three years, it will add in nom­i­nal value the same amount as the whole In­dian econ­omy in one year. So China is poised to still drive growth in the re­gion. “But a slow­down is good, as China can­not sus­tain 6-8% growth for an in­def­i­nite pe­riod. The debt level in the bank­ing sec­tor and so­cial un­rest are risk fac­tors. I think it is more use­ful to pay at­ten­tion num­bers in the in­di­vid­ual sec­tors be­cause they can vary widely, while na­tional GDP is not that im­por­tant. “As No­bel Peace lau­re­ate Mr Sat­yarthi men­tioned last night that planet is one of the 4 ‘P’s that can drive sus­tain­able busi­ness, China is now pay­ing the price for its phe­nom­e­nal growth through the en­vi­ron­men­tal dam­age it wreaked. Its pop­u­la­tion has also peaked, most re­cently re­port­ing zero pop­u­la­tion growth. “Yet China should see an im­prove­ment in the qual­ity and pro­duc­tiv­ity of its work­ers, as many of those reach­ing re­tire­ment age were not ed­u­cated. And the Silk Road Ini­tia­tive should ben­e­fit the bor­der prov­inces.”

Subir Gokarn, re­search direc­tor for Brook­ings In­dia, pointed out the dif­fer­ent chal­lenges to the buoy­ant In­dian econ­omy.

“The drop in oil prices had a three­fold ef­fect on the In­dian econ­omy: it helped in­fla­tion de­crease to 5% from 10%; it helped the fis­cal deficit re­duce be­cause of less money spent on sub­si­dies for fuel and fer­tiliser; and it helped the cur­rent ac­count deficit decline,” said Mr Gokarn. “Right now In­dia is repli­cat­ing the con­di­tions of its high-growth cy­cle from 2003 to 2008, but it has three choke points it must be mind­ful of. The first is food prices, as the coun­try has had a se­ri­ous prob­lem with food in­fla­tion. Food prices have risen 10-20% since 2008 and this re­mains a medium- to long-term threat. Peo­ple here are start­ing to con­sume and de­mand dif­fer­ent types of food, most no­tably pro­tein, and the agri­cul­tural sec­tor is not ready to deal with this shift yet. “Sec­ond, pri­vate in­vest­ment for in­fra­struc­ture has not worked as the coun­try is greatly un­der ca­pac­ity in this seg­ment. Public in­vest­ment is needed as new ports are be­ing built now with­out rail links.

“Fi­nally, In­dia’s de­mo­graph­ics are dif­fer­ent than China’s and the coun­try can­not du­pli­cate that model. Tech­nol­ogy

is far be­yond where it was 30 years ago and In­dia needs to adopt the lat­est stan­dards. “Deal­ing with th­ese three bot­tle­necks should un­lock growth in In­dia, but it could still be five to six years be­fore we ac­com­plish it.” Ms Whe­lan noted that cycli­cally In­dia was primed to reach 9% growth in the fu­ture be­cause in­ter­est rates are go­ing to de­crease.

“The long-term po­ten­tial growth rate is 7-7.5%, and it is go­ing to be qual­ity growth be­cause the in­ter­est rates will be set by the mar­ket with less gov­ern­ment in­ter­fer­ence,” she said.

“With Mr Modi, I ex­pect three steps for­ward for ev­ery one step back. I am shocked ev­ery time I come to In­dia how ex­pen­sive things are here.”

Re­turn­ing again to China, Ms Whe­lan said it is be­com­ing a tougher place for for­eign in­vestors to do busi­ness be­cause the Chi­nese are only in­ter­ested in those in­vestors who will bring in tech­nol­ogy that they can copy quickly. “This is not such a con­cern for Nor­way as we are mainly con­duct­ing busi­ness-to-busi­ness trans­ac­tions, with not as many busi­ness-to-con­sumer com­pa­nies,” said Mr An­der­sen. “Our in­dus­tries are so sec­tor-fo­cused.”

“But the more se­lec­tive Nor­we­gian com­pa­nies would do well to look to In­done­sia and Viet­nam.”

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