Emerging Economies: An Update Professor Sunil Poshakwale Andrew Kirchner Recent data suggests the world economy is coming out of recession. Today, I am joined by Professor Sunil Poshakwale to look at the emerging economies. Sunil, before we look at the major ones, China and India, can you give us an overview of the wider picture? Sunil Poshakwale Andrew, to me emerging markets were never in recession. The demand in china and India has continued to remain buoyant and the property sector, the stock markets have continued to do very, very well. In fact the foreign institutional flows to emerging markets, particularly India and China, have remained buoyant; and the overall performance of the markets has been very, very good. In fact, in my view, emerging markets may have saved the whole world from going into global financial crisis – so called depression – because really historically these markets have contributed to about 30% of the world GDP growth, and this year, their contribution may indeed cross 100%. Andrew Kirchner Let’s look at China specifically. We have got 7.9% growth in quarter two, that’s up from 6.1 in quarter 1; a stimulus package of nearly $600bn. Can China act as the engine for the growth of the world economy? Sunil Poshakwale Absolutely, it will. If I remember correctly, I did say this in the previous interview, that to me the Asian emerging markets – the Asian emerging markets – including India and China etc, they would be the powerhouse in the future; they will be the engine for recovery of a derailed train of the global economy that we have at the moment. The urban and rural per capita income in China has increased to 9.8% and 8.1% respectively; Shanghai stock exchange is up by 85%; commercial and real estate sector has grown up by 32%. The IPO market – the Initial Public Offering market – is also, because China recently lifted the ban they had put on raising further capital on the corporations, that has been lifted and China’s state construction engineering corporation raised about $7.3bn from the capital market. So all this is actually indicative of the fact that China is actually continuing to grow; yes, there are issues with the Chinese economy which I am very happy to talk about, but as it stands all the data indicates that it is doing very, very well. Knowledge Interchange Online© Cranfield University September 2009 1 Professor Sunil Poshakwale
Andrew Kirchner So do you see the stimulus package continuing in the short term? Sunil Poshakwale It will continue in the short term. I think one must not forget that amongst the emerging markets China stands out in terms of the maximum help that it provided via the state sector to the financial system – as you yourself said, $600bn of fiscal stimulus, plus a number of tax cuts which have helped them to actually stimulate demand. Don’t forget that China has always been an export led economy. Chinese exports continue to fall unfortunately for them because of the fall in demand in the West. But the key for China now is to switch their economy from export led growth to domestic consumer led growth. And that is where the challenges are. Andrew Kirchner China has a huge war chest of US government debt and reserves – what is the game there? Sunil Poshakwale Well, it has built up that war chest over the years because of the huge demand for Chinese goods, particularly in the US. The dollars earned have been stacking up in China to so much extent that the Chinese government was in a quandary over what to do with these dollars. And as you know China has been investing these dollars into going and buying US government debt and investing some money in US banks and so on. Andrew Kirchner You touched on some structural imbalances in terms of say the US and China; the inability of the US to save and the inability of China to spend. What can be done to address those imbalances? Sunil Poshakwale Well I think mostly the Chinese authorities will have to actually make some major policy shifts. They are showing signs of it, but it remains to be seen whether they have done so purely in response to the crisis that was looming on the Chinese economy, or is it going to long term, sustainable policy shifts. China has to move from an export economy to a consumer led economy, there is no doubt about that. There is a huge market in China; the domestic demand can be very large. But there are cultural issues don’t forget with the Asian countries, particularly countries like India and China where people have the tendency to save money rather than spend money. So they always tend to save more than they spend. However, if the interest rates are kept at low levels, the tax incentives continue and China starts to stimulate demand for their own goods which are produced in Chinese factories and sell those goods to their own consumers – and consumers © Cranfield University October 2009 2 Professor Sunil Poshakwale
around Asia, for that matter – rather than trying to always ship those goods to the US, then yes those policy shifts will help China to turn things around. Andrew Kirchner So for growth in the region to continue, is it dependent on the US coming out of recession and growing? Sunil Poshakwale It actually depends on both China and the US largely; other countries, of course, are going to play their own part in this recovering process. Don’t forget India is another large market and has a very large middle consumer class which remains to be, in a sense, exploited fully. It’s already there; it’s happening. People are buying more cars, buying more electronic gadgets and so on, but it is happening. But largely yes; the US remains very important for the global economy because historically the US consumers have been the largest spenders. However, shifts are going to occur because I think people in the West, shocked by this crisis, are going to be looking at their pockets before spending money in future. And equally I think because of the renewed confidence in Asian economies like China and India, their consumers are going to spend more and more. So there will be a gradual shift of consumer power, so to say, from America and Europe to Asia and other emerging countries such as Latin America. Andrew Kirchner OK, let’s turn to India. The Indian economy grew by 6.1% in quarter 2; exports however declined 28%. What is the outlook for the country? Sunil Poshakwale The outlook is mixed at the moment. The foreign institutional investors capital flows are continuing to flow into India. The market is doing OK; the stock market has done alright – it has slightly underperformed the overall emerging market, Morgan Stanley Capital Market International Emerging Index slightly. It has underperformed that benchmark. However, the main worry is the monsoon. As you may have heard, this year the rainfall has been much lower than historical averages. Andrew Kirchner It’s the lowest since 1972. Sunil Poshakwale Correct, that is absolutely right. And that is actually causing a lot of worry because India does depend a lot on the agricultural sector. Of course, if the agricultural sector doesn’t do well, the crops suffer, the commodity prices are likely to increase which are already showing a rising trend. That will stoke up the inflation and that can actually throw some spanners into the economic growth that India has been experiencing over the © Cranfield University October 2009 3 Professor Sunil Poshakwale
years. But on the financial markets side, the markets are holding up. Good bank liquidity and there is much less worry about the solvency, or liquidity of the Indian banking and financial sectors compared to, for example, China. Andrew Kirchner © Cranfield University Sunil, thank you very much for the update. October 2009 4