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Nicholas Spiro
Nicholas Spiro

Macroscope | Is China’s recovery a riskier bet than India’s boom? Maybe not

  • While China’s downturn tops the list of risks in developing economies, less attention is paid to the difficulties in sustaining India’s boom
  • Yet India’s weaknesses, such as a low labour participation rate, a lack of jobs and a large fiscal deficit, should not be overlooked

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A bronze bull statue outside the Bombay Stock Exchange building in Mumbai on March 15. Although Indian stocks have delivered eight years of gains, a trading frenzy among inexperienced retail investors has led to regulatory clampdowns. The actions have had a chilling effect on India’s once-booming market for initial public offerings and caused a brutal sell-off in smaller stocks. Photo: Bloomberg
Nicholas Spiro

Hardly a day goes by without comparisons being drawn between India and China. Such contrasts are invariably inapt and misleading. Not only is India’s economy one-fifth of China’s, the structure of the two economies and the nations’ development paths and political systems are vastly different.

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Yet the diverging fortunes of India and China over the past several years raise important questions about the future drivers of global growth as well as the right investment strategies in emerging markets.

Nobody is suggesting India will catch up with China any time soon. However, even a cursory glance at India’s projected growth – annual economic output of more than 6 per cent for at least the next five years and a weighting in the benchmark MSCI emerging market equity index rising from the current 18 per cent to 23 per cent by 2033 – suggests it could supplant China as the largest contributor to global growth.

If this rosy scenario materialises, it will have a lot to do with China’s woes. While there are signs the Chinese economy has stabilised and sentiment in equity markets has improved markedly in the last two months, much could still go wrong.
The combination of cyclical and structural headwinds, the crisis in the housing market, the weakness of household consumption and the acute challenges faced by Beijing in pivoting to a new growth model prioritising high-end manufacturing is reason enough to be sceptical about policymakers’ ability to restore confidence.
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Global investors remain bearish on China. In Bank of America’s latest Asia fund manager survey, published on March 19, a net 18 per cent of respondents had an underweight position in Chinese stocks, the biggest net underweight stance in the Asia-Pacific region. Last year, China accounted for just one-fifth of foreign institutional investment in Asia’s equity markets excluding Japan, data from HSBC shows.

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