Nothing goes up forever, and the decades long double digit growth of China, and now India, is over. India's Planning Commission Chairman Montek Singh Ahluwalia said during the Boao Asia Forum in China last week that the world will have to grow accustomed to less demand from both nations.
"Given the world economic outlook for the next three to five years, it's not surprising that China and India will grow more slowly," Ahluwalia was quoted as saying in a China Daily interview on Tuesday.
For their part, Chinese leaders have been warning of the coming adjustment. India has been relatively quiet.
Last year, China's Premier Wen Jiabao told the country that the government's target for growth over the next five years was 7.5%. The economy grew over 9% in 2011 after growing at 10.4% in 2010. First quarter GDP figures, to come out this week, are expected to be around 8% in China.
Investors have been closely watching China for signs that the world's No. 2 economy was heading for a hard landing. While consensus is for a soft landing, the bears have been roaring loader over the last two months and China investors, especially those invested in the broad market, have seen their investments move sideways to down over the last year. The iShares FTSE China Xinhua 25 (FXI) exchange traded fund is down 18.4% over the last 12 months and down 15.8% since April 2008.
China's economy grew over 10% throughout the mid 1980s to mid 1990s before suffering from the Asia Tiger crisis in 1997, when smaller southeast Asian nations faced massive debt burdens that caused entire economies to crumble. China then spent another six years growing between 7.6% and 9% before taking a new leap in 2003 thanks in part to the loose money policies of the West that led to the housing and derivatives bubbles in 2008. Easy money flowed into emerging markets, with China being the destination of choice. Billions were spent on fixed asset investments, mainly housing, causing China's own housing bubble, and on in which the government has been slowly deflating since 2010.
India is another story. Last year the economy grew over 10%, but on balance, India's growth rate is around 8%, not double digits. During the crisis years of 2008 and 2009, India's GDP rose by around 7% in real terms.
But China, long the hope of emerging market bulls looking for high return on equity, is transforming. It is no longer the world's cheap labor factory, nor does it want to be. Incomes are rising, with average incomes equal to that of the U.S. back in the 1970s, and on the east coast, per capita incomes are over $20,000, making China's chief urban centers like Shanghai more of a middle income European country than a poor one.
"The most likely path for China is the trajectory Japan followed 30 years ago," said Ruchir Sharma, managing director of emerging market equities at Morgan Stanley in New York. In the early 1970s, Japan's post-war economy was growing so fast that many Americans were concerned that Japan would buy up America. Honda, Toyota and Nissan dominated driveways across the country, replacing Detroit made vehicles. Then the economy matured. "China is on the verge of this same type of natural slowdown," Sharma said in a telephone interview last week. "It's not that China is going to grow below 7%, but it is not going to grow over 10%. That's not bad growth at all. It's still quite good. But investors who are used to double digit growth in China and indeed are still betting on it will be disappointed. China is becoming disappointing," he said.
China and India both have their own home-grown political problems. India is battling corruption and voters are demanding the world's largest democracy shape up. China is going through a changing of the guard that's causing a myriad of political problems. A former top Communist Party leader, Bo Xilai, was removed from his post recently. His wife is allegedly being blamed for killing British businessman Neil Heywood.
Outside the political soap operas, China is grappling with an aging population with no safety net and must build a social security and healthcare network almost from scratch, while India's population is still young, and earn less per capita -- around $1,400 -- than their Chinese counterparts.
Like China, both countries have massive regional differences to tend to. China is trying to build up its interior cities. In India, a north south divide makes it hard for investors to truly make an investment call on a country that has disappointed them for the last several years.
Over the last five, the Wisdom Tree India Earnings (EPI) exchange traded fund, which holds major Indian IT firms like Wipro (WIT), Infosys (INFY), ICICI Bank (IBN) and Tata Motors (TTM) to name a few is down 26%. The broad MSCI Emerging Markets index is down 10.4% and the S&P 500 is up 0.83% over the same five year period ending April 10.
The optimistic view of India may still be right, says Sharma. China's economy is slowing down by design, and its population is aging. That means China companies will have to pay more for labor as the country's labor pool starts to shrink. India could one day surpass China's GDP growth in percentage terms because the population is much poorer, and therefore starting from a lower base.
"Of the two, I'd pick India," Sharma said. Morgan Stanley is currently underweight Brazil, Russia and China.
