China or India? The question about which of these two countries represents the best potential is one of the big decisions facing companies looking to invest in Asia. Gerard Lyons, chief economist and group head of global research at Standard Chartered Bank, believes that both of these mammoth economies represent enormous opportunity, but both also involve some risk.
Addressing this issue last month at Sibos, the annual transaction banking conference organised by The Society for Worldwide Interbank Financial Telecommunication (Swift) in Amsterdam, Lyons began by noting that the world has experienced two ‘super-economic cycles’. The first occurred at the end of nineteenth century lead by the US, while the second was after World War II and was led by Japan. “We are now likely to enter a third super-cycle where the world economy will be driven by the emerging markets.”
Lyons noted that a similar debate took place in London at the end of the nineteenth century over the relative strengths of America and Argentina. “Could one of them [China or India] be the America of the future; could one of them be the Argentina of the future? The fact that many people bet on Argentina at the end of the nineteenth century in my mind shows that we should take nothing for granted: both India and China do have big challenges.”
So the stakes are high, and investors and companies are more than capable of getting it very wrong. But unlike in the nineteenth century, neither country should be neglected, especially in the context of the global financial crisis. “In this crisis, both countries did really well in terms of their macroeconomic policy management. In the West, if you go to the Fed and the Bank of England, they talk of adopting macro protection measures from the East, from the likes of India and China.”
Lyons pointed to a series of developments which will prove particularly interesting for companies. Despite high export levels, the reality is that both China and India are both domestically focused, with large, growing middle classes that will likely only spend more. In addition, both China and India’s SME markets are likely to grow (the latter already boasts 25 million firms employing 60 million people), in turn encouraging development of the retail sector in both countries. Finally, in addition to its ‘world class IT and services sector’, India will need to go into manufacturing to generate jobs for its young population.
“We have done a deep analysis of this at Standard Chartered, and we believe that the arc of growth will go from China through India, and into Africa,” said Lyons. “India is planning to spend $1 trillion on infrastructure in the next four years, hence sectors linked to roads and telecoms will do well. More people coming into the labour force from rural areas looking for jobs mean more microfinance and retail spending.” Additionally, India’s income per head is $1000. As people reach $3000 they tend to buy a car. In America there are 750 cars per head of population; in India there are only 12, he said.
Lyons remained cautious over high interest rates and the impact of capital flows on the two countries. Handling inflation also remains tricky as raising rates to curb inflation attracts even more capital; central banks will need to be alert to this. “I am often asked whether China and India are bubble economies,” he said. “The answer is no, but their economies are prone to bubbles, because as money flows in, it either goes into the stockmarket or into the real estate sector.”
Nevertheless, India has the potential to transform trade between itself and the rest of South Asia, the Middle East, and East Africa. And China? “The three words that dominated the last decade were ‘made in China’. The three words which will dominate the next decade will be ‘owned by China’,” he concluded.