Will China or India be the Asian growth leader over the next 20 years? Ed Smith, head of Asset Allocation Research at Rathbones, bets on the former despite debt concerns.
According to Smith, India is branded as “the new China” by a number of investors since the country currently finds itself in the position China held, in growth terms, at the start of the 21st century. But he said China will remain the largest Asian growth engine over the next 20 years, and should continue to command investors’ attention.
“Given the relative size of the two economies today, it would still take over two decades for India’s GDP to exceed China’s, even if India achieves all of its much needed reform and China achieves very few. Of course, that doesn’t mean that the Chinese stock market will automatically perform better, but it is important to bear in mind the stark difference in size when thinking about allocating capital,” Rathbones’ head of Asset Allocation Research argued.
Demographics will play a key role in both countries’ growth, reckoned Smith, seeing scope for capital deepening in China and in India.
“But in China it will be curtailed by excess debt and overinvestment in state-owned industrial sectors; in India there is a dysfunctional banking system and excessive red tape. Reform and productivity growth is key,” he added.
Smith also dismisses Chinese debt crisis concerns, explaining that if past excesses may reduce new growth and lending to productive projects for the coming years, a significant policy-induced slowdown seems unlikely.
“President Xi is acknowledging that high debt levels pose a risk for future growth, and he remains committed to doubling GDP per capita by 2020. To achieve this, Beijing must balance the amount of reform and deleveraging it can undertake, while maintaining an annual growth rate of 6.3%.
“Politburo member Liu He told Davos that Chinese reform will exceed Western expectations this year. Another top brass, Fang Xinghai, warned that there was too much debt in the system, but that the new super regulator would swoop in if there was any hint of systemic collapse. The quid pro quo is weaker credit growth and that already seems to be weighing on activity.
“Our measure of the credit ‘impulse’ in China has fallen back to zero. Our ‘nowcast’ of the underlying rate of economic growth rolled over in Q4 – the biggest quarterly fall since it began to trend up again in 2015. It’s too early to call a new trend, but this is something we’re monitoring closely,” said Smith.