Investors in China and India might be excused for feeling a bit of whiplash these days.
Three months ago, Asia’s two nascent superpowers were said to be immune from the credit crisis gripping developed nations. More recently, their economic booms were supposed to stabilize global growth. Now both countries are suddenly looking inward and fretting over the destabilizing effects of sluggish growth.
It’s a reminder that 2008 is the year of the contrarian. As it began and a global recession loomed, the so-called Bric nations—Brazil, Russia, India and China—were supposed to save us. Let’s hope Jim O’Neill, the Goldman Sachs Group Inc. economist who in 2001 coined the acronym, is right that the “Bric consumer is going to rescue the world”.
Yet India hasn’t begun to count the fallout from its worst terrorist attack in 15 years. Prime Minister Manmohan Singh’s decision this week to grab the finance portfolio from P. Chidambaram shows how concerned India is about its growth outlook.
Singh is a respected economist. He opened India to foreign investors as finance minister in the 1990s. Yet won’t he be busy enough trying to avoid hostilities with Pakistan, from where the Mumbai attackers reportedly may hail?
China is doing its best to show it’s on top of things. Its efforts seem more like growing panic than steady policymaking. The central bank cut its key interest rate by the most in 11 years last week, and the government said “forceful” measures were needed to arrest a faster than expected economic decline.
“China and India were touted as the saviours of world growth, but very quickly they’re looking third world again, so investors are stampeding for the exit,” says Simon Grose-Hodge, a strategist at LGT Group in Singapore.
You would think China’s recent 4 trillion yuan (about Rs29 trillion) stimulus plan would fall into the forceful category. Yet, Beijing’s plans to spend a fifth of gross domestic product were more spin than reality. Much of it was a tally of existing efforts, and economists were quick to call China on it. Expect China to get far more serious. There’s no doubting China’s importance, not with Merrill Lynch and Co. forecasting it will contribute 60% of the world’s growth next year. Merrill’s forecast of 1.5% global output next year is based on an 8.6% expansion in China. You probably can forget that as China slows.
Economists such as Jim Walker of Asianomics Ltd in Hong Kong are right that “China is now at the heart of the global slowdown”. Chinese officials must be miffed that their economic miracle is being interrupted by a crisis emanating from the US. That’s the risk you run when you create what’s essentially a one-trick economy.
China’s mercantilist model leaves it dangerously dependent on US consumers, now in the midst of a huge clampdown on spending. And China missed its chance to revalue its currency at a higher level to stimulate the domestic demand it lacks.
US treasury secretary Henry Paulson looks clueless this week as he visits Beijing to push for a stronger yuan. China effectively said “don’t bother” on Tuesday when it fixed the currency’s daily reference rate at the lowest in five months. Paulson should save taxpayers’ money and cancel his trip. What’s the point? If Walker’s prediction that China will grow 4% or less next year—with a 30% chance of a contraction—is even close to being right, the nation is in huge trouble. The world’s most populous country needs to grow closer to 10% to generate the jobs needed to contain social unrest.
Costs of terror
In India, growth may drop to 6.5% in 2009, from 9% in the year ended March, according to CLSA Asia-Pacific Markets. If the global crisis worsens, that call might prove too optimistic. Exports declined for the first time in seven years as recession in some of India’s biggest markets, including the US, damped demand. Overseas shipments in October dropped 12.1% from a year earlier.
The global crisis is one thing. Exporters also worry about the fallout from the terrorist attacks in Mumbai that left 183 dead. The concern is that the shock waves will damage the business environment, inhibit foreign investment and depress tourism.
What if companies in Japan, Germany and elsewhere recall India-based staff? It’s a reminder that geopolitics often trumps economics in Asia. Look no further than Thailand, where the constitutional court on Tuesday dissolved the ruling People Power Party and two coalition partners, forcing Prime Minister Somchai Wongsawat to step down. Protesters holding Bangkok’s airports were thrilled. Investors were left wondering what it all means.
China and India boast incredible potential. At the moment, they are teaching investors a course in Economic Whiplash 101. One lesson is the risk of developed nations relying heavily on developing ones. Another is the folly of less advanced economies thinking they can thrive as the biggest ones plunge. Our world is too interconnected for that.
The US started this mess, yet Asia’s shiniest growth stars may be among those paying the biggest price. The only real winners are likely to be neck-pain therapists.
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