Economic prospects for China, India and ASEAN: A Roundtable
By Eric Baker, for Thai-Norwegian Chamber of Commerce
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.
“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.”