Home / Opinion / Columns /  A tale of two economies trying to put covid behind them

The Chinese Communist Party rarely steps back from mistaken policies. Even its historical assessment of Chairman Mao, whose legacy included millions of deaths during the Great Leap Forward and the Cultural Revolution, is tragically characterized to this day by the party as 70% correct, 30% wrong. But, this past week it abandoned its strategy of the past three years of using harsh lockdowns and draconian de facto police sieges of residential complexes and the rounding up of even those who merely came into contact with covid-positive people to send them off to institutional quarantines. In response to widespread protests since late November against these excesses of a surveillance state, the government allowed major cities such as Beijing, Shanghai and Guangzhou to relax rules significantly, with even home quarantine allowed and access to malls and other places eased.

Few cohorts of otherwise intelligent people uncritically admire the leadership of autocracies as Wall Street’s large firms do. No sooner were the new rules being rolled out than Morgan Stanley this week put an emphatic “buy" on Chinese equities and promised major revaluations of price-to earnings market multiples. A signal of a very different kind, however, came this week from Foxconn, the world’s largest contract manufacturer, which reported a 29% drop in revenues in November because of labour unrest and the effects of covid shutdowns at its huge Zhengzhou plant for iPhones. The market bull’s case is that a supposedly omniscient Beijing will smoothly lift restrictions.

In fact, Beijing is setting the country’s medical system up for a very difficult test: Some 85 million Chinese over the age of 60 are inadequately vaccinated. Higher infections could overwhelm the healthcare system and send death rates spiralling, especially as 21 million of these are over the age of 80. A report in Wednesday’s Financial Times, quoting research from Wigram Capital Advisors, a macro economic research firm I work with part-time, warns of acute ICU shortages early next year. Wigram’s modelling suggests that ICU demand in March could be 10 times higher than China’s underfunded medical system’s capacity, and that daily hospitalizations could hit 70,000 by then. The lunar new year holidays in January, which will see millions on crowded trains, could be a super-spreader event.

Covid treatment protocols have improved and it is possible the Omicron wave in China would be less disruptive, but the experience of this variant in India and Indonesia is not a relevant reference point. India has a high vaccination rate across age groups. Importantly, our Covishield is a superior vaccine to the two Chinese-made vaccines that do not produce enough antibodies without a third dose. India and Indonesia also had higher rates of natural covid immunity because much of the population had already been infected; the hitherto sheltered Chinese population has very little.

This epic battle between covid and the CCP will play out against a backdrop of an economy that has several systemic comorbidities—just as India’s does, though of a different sort. The thesis of an ascendent Asia just because large developed economies of the West are facing recessions seems simplistic. China’s property market is in the doldrums. After the 2008 financial crisis, Beijing raised government debt levels dramatically as China went on an infrastructure binge. This time the government’s fiscal actions have been much less pronounced because local government debt is already high and provincial administrations have spent so much money on mass testing and quarantines.

Meanwhile, India’s Q2 GDP growth figure of 6.3% may have triggered an upward revision from the World Bank, but as our former chief statistician Pronab Sen told Karan Thapar on TheWire, our GVA growth of 5.6% in the quarter is “fairly low." Sen’s worry is that government subsidies have come down, which, along with higher tax receipts, in effect boost GDP growth numbers in the short-term, but deprive people who still need help from the implosion of their livelihoods due to the pandemic. Far too many have returned to the subsistence economy of rural India. In recent months, fast moving goods companies have been reporting weak consumption in villages.

India, as G20 chair this year, is thus a dystopian economic case study: It is facing an extreme K-shaped recovery. Imports continue to rise, buoyed by demand from India’s well-off, while labour-intensive industries fall further behind, even as large corporates gain market share. Speaking to me recently, Sen took heart from the fact that term lending to non-corporates (mainly small and medium enterprises) is growing at a reasonable clip: “After the bloodbath we have had in the SME sector, that’s a good thing." The hope is that this sector, disproportionately important for job creation, might start hiring heavily again.

Trouble is, as low single-digit port traffic numbers and recent weak exports show, our economy is decelerating because it’s in a pincer between slowing global growth and persistently high inflation at home. Sen worries that weaker exports leave India even more dependent on domestic consumption, which is higher as a proportion of GDP than it has been historically. To get inflation under control, the central bank is hiking rates into a weakening economy, raising the repo rate to 6.25% on Wednesday. Happily, Morgan Stanley predicts India will become the “factory to the world". We have heard this many times before, but let’s hope the prediction is 70%, or even 30%, correct.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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