CHINDIA
A tale of two giants
ABN AMRO
Emerging Market Analysis & Multilateral Organisations
Serdar Küçükakın
Swe Thant
May 2006
Emerging Market Analysis & Multilateral Organisations
Table of contents
Introduction
3
Chapter 1:
China and India in the global economy
5
Chapter 2:
Competitive issues
10
Chapter 3:
Infrastructure
13
Chapter 4:
International relations
16
Chapter 5:
Trade and FDI opportunities for the Netherlands
22
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Introduction
After decades of self-inflicted isolation, China and India have made a grand
entrance on the world stage. Markets have been forced to pay attention to the two
neighbouring Asian giants because of their growing influence on global economic
trends. The two countries have had an enormous impact on commodity prices and
on global economic growth. Their competitive labour costs mean that they are
expanding their global market share in a number of industries. The low prices of
Chinese and Indian exports remain a powerful force for global disinflation. The
importance of the two countries extends far beyond the current business cycle.
However, it must be remembered that they still have a long way to go when it
comes to the living standards of their populations, which are still very low
compared to those of the Western world. Furthermore, growth in the two countries,
and especially in China, has so far benefited mainly urban populations, laying the
ground for social unrest in rural areas.
Looking at the economic dynamics of the two countries, in terms of demographics,
education, labour market flexibility, capital formation and infrastructure, the two
economies diverge considerably. Because of its one-child-policy China will
experience the effects of ageing much faster than India. According to projections,
growth of the working age population in China will halt in 2020 and decrease
thereafter. This will have an adverse effect on the potential growth of the country.
However, India will face the challenge of creating jobs for its growing working age
population. So far, it has not succeeded in delivering the jobs it needs, partly
because of the very small amounts of foreign direct investment (FDI) in
manufacturing (the sector which can absorb large amounts of low skilled labour
readily available in India). China, on the other hand is experiencing large FDI
inflows. FDI played an important role in capital formation in China, especially in
the beginning of the reform process (‘opening up’), which was set in motion after
1978. Given its enormous savings rate, the importance of FDI is declining in
China. Now it looks like India is the next hot spot when it comes to attracting FDI.
However, to become a really attractive location for foreign investors India needs to
upgrade its physical infrastructure, which is more and more perceived as an
impediment to growth rather than supporting it. Since China started reforming, it
has made an enormous effort to upgrade its physical infrastructure and it is
therefore way ahead of India. Unfortunately, China neglected to apply the same
zeal to its banking system. The Chinese banking sector continues to be dominated
by large state owned banks. State owned banks also play a major role in India, but
there is more competition from private sector (including foreign) banks. This,
combined with a better risk appraisal system, makes the Indian banking system
more robust than China’s.
Apart form such economic differences a major difference between the two
countries is of course in their political systems: China is a one-party state whereas
Indian is a parliamentary democracy. In China, internal policy is strongly focused
on maintaining the political stability of the country. In India, the largest democracy
of the world, policy making for any government can be seen as a balancing act,
given the very fractious setting of the parliament. In international affairs, China, as
a permanent member of the UN Security Council, traditionally has had a hand in
world politics. India, on the other hand, lost its traditional role in the international
political arena when it lost its position as a leader of the movement of non-aligned
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nations at the end of the cold war. It is redefining itself as a regional power with
global aspirations.
Last but surely not least, the economic development of the two countries, which is
set to go on for the foreseeable future, offers enormous possibilities for the
Netherlands in terms of FDI and trade. Looking at past trends and extrapolating
these to the future it seems that India is the more promising of the two emerging
markets offering better opportunities for trade and investment for Dutch
companies.
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Chapter 1:
China and India in the global economy
This chapter looks at the impact of China and India on the global economy. The
two countries have made a grand entrance on the world stage.
Contribution to trade and global growth
Total GDP
% US GDP
70
60
50
40
30
20
10
0
36
33
30
27
24
21
18
15
1980
1986
1992
China (l.a.)
1998
2004
India (r.a.)
The calculations are based on the PPP standard
Foreign trade
% global trade
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
7
6
5
4
3
2
1
0
1982
1988
China (l.a.)
1994
2000
India (r.a.)
In the last two decades, foreign trade of China and India has grown at a
considerably higher pace than the world average of 7.3%: 17.3% and 10.9%,
respectively. Especially so for China, whose trade has grown at more than twice
the global rate since the country embarked on economic reforms in 1978. India’s
foreign trade jumped to an average of 13% after the country started its reform
process in 1991.
The composition of China's exports has changed significantly over the past
decade. Despite the public attention last year following the end of the Multi-Fibre
Agreement on Textiles and Clothing, the share of textiles in China’s total exports
has fallen from nearly 24% in 1997 to 15% in 2004. Conversely, exports of 'high
and new technology products' have risen from less than 15% of the total in 2000
(the first year for which data on this category are available) to nearly 28% in 2004.
China's trade balance in these products has changed from a deficit of USD 17
billion in 2001 to a surplus of USD 4 billion in 2004.
The composition of India's merchandise trade has changed much less than that of
China. Textiles and garments still account for 22% of total goods exports, and
gems and jewellery for nearly 18%. These proportions are virtually unchanged
from a decade ago. High-tech products account for just 5% of India's
manufactured exports, compared with 28% for China. For all the world-wide
attention that the sector has attracted in India, it is worth noting that China's
exports of commercial services, other than transport, travel, finance and insurance
(the residual in which IT services are included in internationally comparable
statistics), totalled USD 20.6 billion in 2003, compared with India's USD 18.9
billion.
Meanwhile, on a purchasing power parity basis (PPP), GDP for China and for India
has climbed to around 65% and 30%, respectively, of US GDP in 2005. In
comparison, both countries registered around 15% in 1980. Although China
accounts for only 14% of world GDP it has directly accounted for 28% of the
growth in global GDP during the past 15 years, a figure which is significantly higher
than the 19% contribution of the US Since India started its reform process at the
beginning of the last decade, it contributed 6.5% to world GDP growth.
During 1980-2005, growth rates for China and India comfortably outpaced the
world average. Since 1991, China´s growth rate never dropped below 7.6%.
Furthermore, since the beginning of this millennium, the difference between the
world average and that of the two countries even increased, with the gap between
China´s and global GDP growth peaking in the first half of the 1990s. During 19911995, Chinese GDP growth averaged almost 13% a year, nearly 10 percentage
points above the global average.
India, and, especially, China are typically viewed as powerful export machines,
taking growing market share and acting as deflationary forces on global activity.
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GDP per capita
% US GDP per capita
15
9
12
8
9
7
6
6
3
5
1980
1986
1992
1998
China (l.a.)
2004
The industrialization of the two Asian giants will continue to generate growing
domestic prosperity and, thus, increased demand for a growing range of goods
and services, from automobiles to tourism. Moreover, this trend is still at a very
early stage. The strong growth in India and, especially, China is having a
particularly large impact on the Asia region. For example, China's imports from the
rest of Asia have increased at a considerably faster pace than imports from other
areas, leading to growing intra-regional trade dependence.
India (r.a.)
The calculations are based on the PPP standard
Foreign trade
% GDP
30
80
25
65
20
50
15
35
10
20
1990
1994
1998
India (l.a.)
However, these countries are also huge importers, to the benefit of many
countries. For example, although Chinese commodity imports have attracted much
attention recently, the value of imports of machinery and electrical equipment was
about twice the size of that of imported primary products in the first half of 2005.
China is, in fact, a very open economy with foreign trade accounting for 68% of
GDP compared with 28% for the US. By comparison, the Indian economy is still
relatively closed, being driven more by internal demand. Nevertheless, Indian
foreign trade also increased considerably since the start of the reform process in
1991, especially after the boost from trade liberalisation at the start of this
decennium.
2002
China (r.a.)
Chinese imports
USD billion
600
500
Thus, the development of China and India may be seen as a positive force for the
world economy. The rapid growth of the two Asian countries has provided an
important stimulus to the global output at a time when the industrialized countries
were experiencing difficulties.
However, there is a powerful body of opinion that sees India and, especially, China
as threats rather than as benefits to the global economy. This is particularly so
from the perspective of industries which are at the sharp end of Chinese
competition. The pressures of Chinese competition became apparent when the
global multi-fiber agreement ended at the start of 2005, thereby removing quotas
on trade in textiles and clothing. India is somewhat of a different story. So far,
Indian competition is felt, not through the exports of goods, but rather through the
IT sector. Because of its high quality and low prices, the sector is attracting many
foreign companies, which outsource their IT activities to India.
400
300
200
100
0
1985
1989
1993
1997
2001
Indian imports
USD billion
It is easy to identify lost jobs from displaced local production due to Chinese
imports, but it is hard to measure increased consumer purchasing power due to
lower-priced goods. However, it should be recognized that this purchasing power
gives consumers more money to spend on other goods and services, some of
which will benefit domestic companies. The bottom line is that free trade raises
real incomes and growth and, therefore, China's membership in the global
economy is a positive force.
Where are China and India on the development curve?
100
75
50
25
0
1985
1989
1993
1997
2001
It is important not to confuse the growth in the size of the two economies with their
relative living standards. China's GDP may well overtake that of the US in overall
size in the next 10 to 15 years and India’s GDP will reach half the size of the US
economy in the same period. However, the GDP per capita is still very low by
global standards: around USD 6.270 last year on a PPP basis in China and USD
3.420 in India (or around USD 1.577 and 677 before adjusting for PPP). In other
words, it will be a very long time before per capita incomes catch up with those of
the developed countries.
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Real per capita incomes in China and India are growing at broadly the same speed
as occurred in Japan and Korea during their take-off phases, but the starting point
for incomes is much lower. Both countries have made huge strides in developing
their economies, but in both countries more than half of the population still lives in
rural areas, and agriculture still accounts for around half of the jobs. Especially in
China, the disparity between urban and rural incomes is growing rapidly, so the
migration into cities will continue, as will the decline in agricultural employment,
which goes hand in hand with economic development.
On the plus side, the low starting point for per capita incomes creates a huge
upside potential. There is a massive pent-up demand for consumer goods and
infrastructure development. India, in particular, badly needs infrastructure
investment, the poor state of its infrastructure being perceived actually as an
impediment to economic growth. However, it is a mistake to worry about
infrastructure over-investment in China. There is a huge productivity payoff in
China as new roads and bridges are built. It is not like Japan in the 1980s and
1990s, when wasteful expenditure on public infrastructure projects yielded little or
no return. An apt comparison would be with the US in the late nineteenth century,
when the expansion of railroads and other infrastructure projects fuelled rapid
growth and development.
The development of both countries should continue at a rapid pace, not least
because of the widespread use of new technologies. Major companies from
around the world are expanding operations in China and India to take advantage
of both cheap labour costs and attractive long-term prospects for demand. For
China, this shows up in the continued strong inflows of foreign direct investment
(FDI). While the influx of FDI in India is quite low by comparison, the country’s
bright economic prospects are starting to attract the attention of foreign
companies.
Oil price
China's and India’s impact on commodity prices
USD per barrel
80
60
40
20
2003
2004
2005
2006
Gas price
USD per MT
700
600
500
400
300
200
2003
2004
2005
2006
Energy commodities
The impact of India and, especially, China on raw material prices has been
highlighted by explosive gains in a broad range of hard and soft commodities
during the past couple of years. On a per capita basis China and India use very
small amounts of commodities, reflecting the fact that most people still live in rural
areas with a relatively simple lifestyle. For example, China consumes less than 2
barrels of oil a year per person, compared with more than 15 barrels in Japan and
25.5 barrels in the US Similarly, Chinese per capita consumption of copper and
aluminium is a fraction of that of industrialized countries. However, even low per
capita consumption times 1.3 billion people translates into a large number, and
one that is growing strongly.
Because of strong economic performance and inefficient use of resources, China’s
impact on global energy markets has been substantial. In fact, China has become
the world’s second largest consumer of primary energy (after the US) since 1994.
In the period 2000-2004, China's primary energy consumption rose at an average
annual rate of 12.5%, compared with a world average of around 3%. In other
words, China’s energy consumption was more than four times the world average.
Furthermore, China has accounted for 46% of the increase in global primary
energy consumption over this period
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Oil intensity index*
3
2
1
0
China
India
World
US
Japan Germany
Av erage
* Oil intensity index measures the quantity of oil required to produce
one USD billion of GDP
The fact that China's energy consumption has risen at a more rapid pace than the
level of economic activity implies that China's energy efficiency is low. In fact, the
whole Asian region is a least efficient user of oil and other forms of energy in the
world. Over the past decade, the developing economies of Asia accounted for
about 40% of the total increase in world oil demand, larger than the 35% share of
increase going to the OECD countries. Not surprisingly, about three-fourths of
developing Asia’s increase in oil consumption was concentrated in China and
India. Both countries have extremely high oil intensities: in 2004 these were twice
as high as the world average and far higher than those of developed countries like
the US, Japan and Germany.
China's impact on the global coal trade has been even more striking. China is the
world's largest coal user, by a wide margin. Although China also exports thermal
coal, its imports (mainly of higher-quality coal) have increased more than four-fold
in the same period. Because of the rapidly increasing electricity generation,
consumption of coal has risen at an average annual rate of 14.2% in the period
2000-2004, accounting for 70% of the increase in global consumption in this
period. It thus seems almost unarguable that the demand for energy, to fuel
China's rapid industrialization and growth, has been an important, if not the most
important contributor, to the sharp rise in energy prices over the past few years.
India's economy is considerably less energy-intensive than China's, in part
reflecting its much smaller manufacturing sector. India has been the fifth largest
consumer of primary energy since 2001, when it moved past Germany. Its energy
consumption has risen at an average annual rate of 4.3% over the past five years,
accounting for 5.4% of the increase in total world primary energy consumption
over this period, similar to the share of the US
India is the sixth largest consumer of oil, and has accounted for 7.1% of the
increase in global oil consumption in the period 2000-2004. India is the world's
third largest consumer of coal, and the growth in its consumption over the five
years to 2004 represented 6.9% of the increase in total global consumption, a
proportion exceeded only by China.
Other mineral commodities
China’s rapid industrialization has also had a significant impact on the markets for
metals and minerals. In 2004 China produced around 300Mt of steel, twice the
amount produced in 2001. China has thus emerged as a major source of demand
for iron ore and coal.
Coal price
USD / MT
90
80
70
60
Although China is the world's largest producer of iron ore, the quality of Chinese
iron ore is low. Therefore, the country also imports an enormous quantity of iron.
China´s iron ore imports have risen at an average annual rate of 30% over the
past five years, accounting for over 85% of the increase in global iron ore trade.
50
40
30
20
1997
2000
2003
2006
Similarly, although China is a large producer of coking coal, the quality is poor, and
Chinese imports of coking coal have jumped sharply from less than 0.5Mt per year
prior to 2003 to 6.8Mt in 2004. Although this represents only 3% of total world
trade in coking coal, China has accounted for one-third of the increase in coking
coal trade over the past two years. India overtook Brazil in 2004 as the world's
third largest importer of coking coal (behind Japan and Korea); and has accounted
for a further 16% of the increase in global imports over the past two years. Against
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a background of very tight supplies, Chinese and Indian demand has been a key
contributor to the rapid increase in coal prices during the past few years.
Copper cathode
USD cents C / LB
China's demand for copper has risen 75% over the past five years, accounting for
the entire increase in global demand. In the US, which was the world's largest user
until overtaken by China in 2001, copper usage has fallen by more than 12% over
this period. With production of refined copper disrupted by maintenance programs
at a number of smelters around the world over the past year, copper prices have
more than doubled over the past two years.
4.5
3.5
2.5
1.5
0.5
2003
2004
2005
2006
Aluminium price
USD per MT
3000
2500
2000
In 2004, China overtook the US as the world's largest primary consumer of
aluminium, and growth in Chinese demand has accounted for half the increase in
global primary aluminium consumption during 2000-2004. However, in this same
period Chinese aluminium production has risen at an average annual rate of 20%,
faster even than its rate of consumption (16% pa). In other words China, has
become a net exporter of aluminium. Therefore the rise in aluminium prices has
been much less pronounced than that of other metals where China is not a
significant net exporter, such as copper, nickel and zinc.
Over the medium term, continued rapid growth and industrialization in China, and
to a lesser extent, India, is likely to underpin demand for and the prices of those
mineral ores and metals which these two countries are unable to produce for
themselves, a prospect of considerable benefits to commodity suppliers.
1500
1000
2003
2004
2005
2006
Agricultural commodities
The impact of rapid Chinese and Indian economic growth on markets for
agricultural commodities has been less pronounced than on markets for minerals
and energy. This largely reflects the fact that world markets for agricultural
commodities continue to be highly distorted by trade barriers and subsidies
(including those of China and India themselves). Like the EU, Japan and the US,
China and India attach great importance to 'food security' and are willing to force
their consumers to pay higher prices for food in order to ensure this, and to
subsidize the production of commodities such as wheat. However, China has
reduced its weighted mean import tariffs from 14.1% in 1992 to 5.6%. On the
contrary India's weighted mean tariff on agricultural imports has risen by nearly
three percentage points, to 36.9%, since the early 1990s.
Corn price
USD cents per bushel
300
250
200
150
2003
2004
2005
2006
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Chapter 2:
Competitive issues
In this chapter we look at the competitiveness of China and India. By doing so, we
analyse the developments in demographics, education and capital formation.
Labour
Additional working age population by 20010
Million
100
80
60
40
20
0
-20
83
73
56
41
38
20
13
0.04
Japan
Western Europe
US
Western Asia
Latin America
South East Asia
China
Africa*
India
-3
Demographics
The big and growing importance of the two countries to the world and their
astonishing rates of growth is further underscored by their sheer size. In 2005, the
two countries accounted for more than one third of the global population and
around 40% of the working-age population between 15-64 (years of age). By 2010,
India and China will contribute an additional 83 million and 56 million people,
respectively, to the global labour pool. In comparison, the US will contribute 13
million people and Europe just 0.1 million during this timeframe.
Million
The substantial reduction in the size-difference in population between the two
countries can, of course, be attributed to China’s one-child policy, which led to a
significant reduction in population growth in the past decades. India also
experienced a reduction in population growth, but in the absence of a policy like
China’s, the reduction was far less pronounced, resulting in a higher population
growth. India's population is growing at a rate of 1.6%, compared to China's rate of
0.8%. In other words, India is quickly closing the population gap.
1990
As a consequence of its one-child policy, China has also benefited from a
1
considerable fall in its dependency ratio . This ratio has fallen from 79% in 1970 to
43% in 2003. During the same period, the decline of the ratio was far less
pronounced for India, from 79% to 61%. In fact, China's age dependency ratio will
continue to be lower than that of India until 2025 even though it is likely to bottom
out at 40% in 2010. However, from 2025 onwards China will suffer from a sharp
rise in its age dependency ratio.
* Africa includes a group of 56 countries
Working population age
1200
1000
800
600
400
200
0
1950
1970
„ India
2010
2030
2050
China has managed to convert the advantage of a growing work force into a
virtuous loop of creating productive jobs that lead to higher savings, investment
and growth. This growing working population has been able to find productive
employment opportunities and, in turn, generate adequate savings to finance
higher physical capital accumulation. China's savings rate has increased from 34%
2
in 1980 to 50% in 2005 . In turn, this has financed the acceleration in growth of
physical capital accumulation and GDP.
„ China
Age dependency ratio*
%
80
70
Measured in terms of age dependency ratio trends, India is about 15 years behind
China. India's age dependency ratio should improve, albeit gradually, over the next
20 years. Whether this will translate into higher savings, investments and growth
for India remains a question. This will depend on the reform success of the
60
50
40
1950
1970
1990
2010
2030
2050
1
—— China
—— India
* Proportion of non-working population to working population
A measure of the portion of dependents in a population (people who are too young or too old to
work). The dependency ratio is equal to the number of individuals aged below 15 or above 64 divided
by the number of individuals aged 15 to 64, expressed as a percentage. A rising dependency ratio is a
concern in many countries that are facing an ageing population, since it becomes difficult for pension
and social security systems to provide for a significantly older, non-working population.
2
The flip side of the coin of why the savings have grown so substantially is the lack of a social
security system in the country. People need to save to make up for this. Furthermore, since the
financial system is not functioning optimally, many private companies do not have access to bank
funding. Therefore, these companies are forced to have high savings in order to be able to invest.
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government. In this regard, the trend over the past 13 years is a case in point. In
this period India’s dependency ratio, as stated above, improved considerably.
However, there has been a negligible improvement in the savings and investment
rates in this period. Although household savings did rise during this period,
aggregate savings remained relatively stagnant, because of government
overspending due to poor management of public finances and the slow pace of
reforms. Over the next 10 years, there should be further improvement in India's
age dependency trend, in turn improving its savings and growth potential. As
mentioned, however, a comprehensive set of reforms will be necessary to achieve
this growth potential. Compared to the past, the Indian economy today is more
integrated with the global economy. This process will most probably continue in the
years ahead. This in turn will have a positive impact on the reform process of the
country.
Illiteracy rate
%
60
50
40
30
20
10
0
1980
1990
„ China
„ India
2000
Education
One of the primary indicators of competitiveness is the primary school enrolment
ratio of a country. The basic assumption is that, in the long run, an educated
population will have a positive impact on the competitiveness of a country. Both
China and India have an gross enrolment ratio of around 100%. However, the
percentage of children reaching grade five shows India is lagging behind China:
61% against 99%. Furthermore, India is behind China in comparisons of the
conditions of education. The pupil-teacher ratio (the number of students per
teacher) for primary education in China was 21:1, compared to 40:1 in India in
2002.
China also scores better in comparisons of secondary education (entrance age 10
years) between the two countries. The percentage of the relevant age group
receiving full-time education in China is 70%, compared to 52% in India. The
pupil-teacher ratio for secondary schooling in India is 34:1 versus 19:1 in China.
As a result of these observations, the Indian government has initiated a greater
focus on schooling in recent years. But the size of the problem suggests it will take
decades, if not longer, before the problem is resolved. India has about 200 million
children in the 6-14-year age group, but only 120 million are enrolled in schools,
while net attendance at the primary level is just 66% of the enrolled portion.
According to World Bank estimates, male youth illiteracy in India is 20% compared
to 1% in China.
However, India is ahead of China in terms of the proportion of the population that
has finished tertiary education. According to the IMD World Competitiveness Year
Book (IMD), in 2002 about 8% of the population in India between the age of 25-34
had attained some tertiary education, compared with 5% in China.
Another edge for India is that a majority of the tertiary programs use English as the
main medium of instruction. This is not the case in China. India adds about 2.3
million graduates with a bachelor’s degree and about 300,000 engineers, annually.
In terms of the degrees that are awarded, the university education system meets
the competitive needs of the economy. IMD ranks India as 6th among 60 nations
with a score of 6.44 out 10, compared to a ranking of 58 for China with a score of
3.38.
Because of its higher enrolment ratio in tertiary education, India has a larger pool
of skilled workers, especially engineers, than China. According to IMD, in 2002
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India ranked first among 60 nations in terms of availability of skilled labour,
th
especially qualified engineers, while China was in 57 place.
Labour flexibility
The competitiveness of a country’s labour market is not only determined by the
education level of its labour force, but also by the flexibility of its labour market. A
greater flexibility of the labour market enables the economy to respond better to
cyclical as well structural changes.
Gross investment rate
Since the reforms began, the Chinese labour market has become considerably
more flexible in the process of hiring and firing employees. While the reform
process initially aimed at the private sector labour market, at the start of the last
decade China began implementing changes that touched public sector
employment as well. From 1990, China started implementing a lay-off program for
state-owned enterprises. According to an IMF study on China's labour market, an
estimated 25 million workers were laid off from state-owned enterprises and
collectives during 1998-2002.
% GDP
50
40
30
20
1990
1993
1996
„ China
1999
2002
2005
In comparison, India's labour laws remain restrictive. Indeed, the World Economic
th
Forum's global competitiveness report (2003-04) ranks India 96 out of 102
th
countries on hiring-and-firing policies, compared with a 26 for China. The labour
market is especially rigid for companies with 100 or more employees. Dismissing
employees from such companies is only possible after a lengthy and time
consuming approval process. However, this law is only applicable to employees
working in the formal economy, which accounts for only a fraction of the work
force.
„ India
Gross savings rate
% GDP
50
40
30
Capital
20
10
1990
1993
1996
„ China
1999
2002
„ India
Contribution to growth in the 1990s
% pa
4
3
2
1
0
Labour
Capital
„ China
„ India
TFP*
2005
Looking at the growth differences between China and India, one can only conclude
that the difference in capital accumulation has played a major role. The growth in
India, like in many other emerging economies, is constrained by insufficient
availability of capital. A corresponding weakness is the low level of savings,
especially savings by the government, which can be converted into investment.
Furthermore, poor access to foreign direct investment also plays a role in the
equation.
China has a huge savings rate that has increased significantly since the start of its
reform process in the late 1970s. The high savings rate, together with an
enormous influx of FDI, resulted in a very high investment rate. China is actually
experiencing over-investment which has led to declining returns. China needs to
tackle this problem by broadening the growth-base of the economy. It is
disproportionably dependent on investment and export, while the proportion of
private consumption in the GDP has been declining since reforms began.
By comparison, the most important cause of a poor public savings trend in India is
the government deficit. The general government deficit for the fiscal year
2004/2005 was 7.5%, while public debt stood at about 86% of GDP. Because of
the sizeable government deficit, the overall savings rate of the country is stagnant.
This relatively low savings rate is a constraint on fixed investment.
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Chapter 3:
Infrastructure
This chapter looks at infrastructure and analyses whether the country’s
infrastructure is supporting or impeding economic growth.
Lead time of exports to US
Number of weeks
5
4
3
2
1
0
Processing time at
customs for
imports
Time at customs
for exports
Loading/unloading
time at ports
Transit time
„ China
„ India
Average costs of freight for imports
Freight payments as % of total import value
12
10
8
6
4
2
0
India
Emerging
markets
World
Developed
economies
Electricity costs industrial clients in 2002
USD / KWH
0.10
0.08
0.06
0.04
0.02
0.00
Physical infrastructure
Since China started its reform process, the country has put enormous effort into
upgrading its infrastructure, intensifying its efforts especially in the 1990s. Looking
at India, in comparison, one can only conclude that India´s investments in
infrastructure are lagging behind China´s. As noted before, the poor state of
India´s physical infrastructure is actually being perceived as an impediment.
In 2002, China spent more than USD 250 billion on infrastructure, while India
spent, USD 31 billion. As a result, China has 30.000 km of highway, approximately
ten times more than in India.
So far, lack of funds, stemming from high budget deficits, has been a major
constraint in India. However, the Indian government is keen on improvements to
the infrastructure, and has taken several encouraging steps in the past few years.
All diesel and petrol taxes were raised to fund infrastructure investments. Since the
required funding can not be raised by the government alone, due to budget
constraints, the government is seeking the participation of the private sector. While
public-private partnerships could be a solution in India, they did not work in, China.
In China only about 9% of the total highway spending in the 1990s was funded by
the private sector. About 70% of the investments were funded from road
maintenance fees, vehicle purchase fees and other government revenue sources.
In short, India needs to get its public finance in order to find (public) funding for
infrastructural projects.
Italy
India
Singapore
Korea
Taiwan
UK
US
Germany
France
China
Sweden
An important facet of a physical infrastructure are harbours. The efficiency of
Indian harbours has increased considerably in the past years because of
privatization. However, India still has a long way to go, compared to China. China
has invested enormous amounts in upgrading its harbours, because they play an
essential role in its export driven growth. In fact, three of the top 10 ports in Asia
are in China. The efficiency of Chinese ports in comparison to those in India is
evidenced by the average lead time for consignments to the US: it takes 6-12
weeks from India, whereas it takes only 2-3 weeks from China. The overall
inefficiency at Indian ports has been a key reason in the preference of global
shipping lines to establish hub in Singapore and Dubai.
Despite the low quality of roads and harbours, both countries but especially India
suffer the most from lack of consistent and high infrastructure services. The
electricity sector is a case in point. Companies in China and India regularly suffer
power blackouts. The summer of 2005 saw serious power shortages in parts of
China. However, the situation looks even more serious in India. In 2003, the power
shortages is estimated at 9.1%, up from a 5.9% shortage in 1999. As a result, 61%
of manufacturers in India have their own generators, compared to 27% in China.
Apart from the poor availability of electricity, tariffs charged in India are among the
highest in the world. An inefficient distribution setup and cross subsidization to
residential customers and farmers results in a large part of the burden being borne
by industrial customers. Currently, about 20% of the electricity generated in the
country is distributed to farmers at an almost negligible charge. Another 40% is
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lost in transmission and distribution. Hence, about 60% of the total electricity
produced yields virtually no revenues.
The financial system
A strong banking sector is one of the key ingredients for rapid and stable economic
growth in transition economies. An efficient financial sector can promote savings
and enable the flow of a larger share of savings into productive investments. The
efficiency of the banking sector will be important for the systemic stability of the
financial system.
Comparing the banking systems of the two countries, India shows a far better and
healthier financial system, based on factors regarded as essential to a healthy
financial system. First, India has a central bank with clear cut rules for
safeguarding the stability of the financial system. The supervision of the Reserve
Bank of India (RBI) is at some points even stricter than international safeguards
such as the Basle requirements. For example the Capital Adequacy Ratio (CAR)
set by the RBI is at 9%, whereas the Basle requirement is 8%. This stricter
requirement has resulted in a CAR of above 10% in recent years. This has
resulted in higher earnings and hence in an improved capital base. Furthermore,
the RBI changed the Non-Performing-Loans recognition norm (NPL) from 180
days to 90 days in 2004, in order to ensure that the asset quality of the banks
remain sound.
In China, the four large state-owned banks, which account for about 55% of the
total assets of the banking system, have traditionally been operating under the
strong influence of government bureaucracy and mandates. This has resulted in
multiple and mixed business goals for banks. Their ownership structure and
corporate governance have adversely influenced their ability to evolve a selfmanaging risk-assessment system. Because of this strong state interference with
the banking system, the capital adequacy ratio in 2003 was a mere 4.6%. Although
the government improved the CAR of two large banks (Bank of China and China
Construction Bank) by injecting USD 45 billion in January 2004, the CAR of the
rest of the state-owned banks remains weak. Even for the joint-stock banks, the
capital adequacy was just 6.8% compared to the Basle requirements of 8%.
Secondly, the risk appraisal system in India is much more robust than that of
Chinese banks. This is especially so in private and foreign banks which have
implemented IT-solutions. Public sector banks, by comparison, have inferior risk
assessment systems, as evidenced by higher NPLs. Even so, they are still
superior to those at Chinese banks, which lack adequate data collection on
borrowers and facilities for a quantitative approach to measuring and managing
credit risk. However, Chinese banks are now gradually trying to improve their
credit appraisal process, bringing in international best practices.
Thirdly, as a result of strict supervision by the RBI and better risk appraisal
systems, the asset quality of Indian banks has improved considerably in the past
years. The NPL ratio dropped to 8.8% in 2003 from 15.7% in 1997. In China, the
lack of an adequate risk assessment system has resulted in large balances in nonperforming assets (NPA) in the banking system.
Last but surely not least, the competition in the Indian banking sector is greater
than in China. Halfway the 1990s the RBI allowed the private sector to open new
banks, which has increased the level of competition. As a result, the share of (less
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efficient) public banks in the total assets declined from 85% in 1996 to 74% in
2003. Furthermore, the increasing importance of foreign banks, which used to
operate as branches in India, but are now allowed to set up subsidiaries, will likely
further boost competition in India.
Until the early 1990s the People’s Bank of China (PBOC) was the key bank In
China. With the start of the reform process in 1978, the government created four
new banks and gave regulatory responsibility to the PBOC. Up to the late 1990s
there were no other commercial banks in China. Since then several banks with
joint ownership have been formed, and foreign banks are allowed a limited
presence in the banking system. However, the lion’s share of the banking system
is still in the hands of the four big state banks. The limited competition in the
banking system in China can be interpreted as a weakness.
In sum, and according to the IMD World Competitiveness Yearbook, India scores
far higher than does China in banking and financial services and the transparency
of financial institutions.
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Chapter 4:
International relations
This chapter highlights developments in the internal and external political
landscapes of China and India. It looks at the status, direction and impact of their
political relationships, and the factors driving the developments.
Political relations
Despite their similarities as Asian giants and as two of the world’s most robust
emerging markets, China and India are markedly different in their respective
political affairs. These differences are reflected in their domestic and international
politics; their approach to the management of these relations; and their impact on
regional and global politics.
China’s internal and external politics are driven by its controlled transition to a
market economy and its emergence as a strategic power in the new geopolitics.
Internally, China’s political environment is stable with the government and the
Communist Party exerting control over most aspects of the society. Externally,
China is involved, active and influential. As a permanent member of the UN
Security Council, it wields enormous influence in how major crises, such the Iran
nuclear stand-off, are resolved. In general, China shows a preference for
pragmatic policies, and an interest in avoiding conflict and confrontation. However,
its bilateral relations, its military build-up, its profile as an arms merchant, and its
lack of transparency and accountability defy expectations of China’s positive
impact on world stability and change.
India, by comparison, remains a tumultuous democracy, ensnared in the
challenges of being the world’s largest democracy in economic transition. Its
domestic political environment is riven with instability. Its engagement in foreign
affairs appears limited in scope and influence, and is no longer suggestive of the
impact India once bore as the leader of non-aligned nations in the cold war.
Internal politics: China
China’s domestic political stability rests on a number of features. Power remains
centralized in Beijing and in the Chinese Communist Party. There is no organized
challenge to the current power structure. Unlike India, China has no separatist
groups, nor militant ethnic factions to compound the problems of economic change
with issues of political security. The government maintains tight control over mass
media and the Internet. The country has experienced strong economic growth that
has favoured the rise of a strong, urban middle class. To strengthen its economic
program and release social pressures, the government has introduced a populist
reform agenda. It aims at creating “a harmonious society” with more balanced
regional and socio-economic growth and more accountability for public authorities.
Against this backdrop of overall political stability are growing strains of public
discontent. Like India, China’s economic growth has favoured urban areas, leaving
the rural economy behind with 2/3 of China’s 1.3bn population. It has created
regional disparities in economic growth and income; raised volatile issues of
peasant land-use and land-rights; and made public corruption an open issue.
Additionally, China’s economic progress has extracted costly and disastrous
environmental damage: massive chemical spills, such as the 80-kilometer sludge
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of benzene and toxic chemicals that covered the Songhua River last November;
and severe pollution that have ruined the land and health of residents in several
villages. These are major sources of discontent that have erupted in violent
protests and mass demonstrations by farmers and peasants. In 2005, the
government recorded 87,000 protests and “mass incidents” (Global Insight, May
2006). They have also given rise to activists who have begun to openly challenge
local officials for corruption, and China’s legal system over land use and peasant
rights.
Mindful of the potential for public unrest to foment greater instability, the
government has responded with a promise for more accountability by government
authorities, and with a rural reform agenda. The “New Socialist Countryside” will
attempt to redress the socio-economic and environmental ills of rapid and unequal
growth. Among other things, it will provide massive infrastructure spending, and
more money for education and medical care.
While the government has loosened its reins on the economy, it continues to hold
firm on political liberalization, trying to avoid pitfalls that could destabilize the
political order. Limited forays, such as direct elections at selected village levels,
are offset by strict controls. They include media censorship and party control over
law enforcement and judicial decisions.
Internal politics: India
India provides a contrast to China. India’s internal political environment is generally
unstable. It is a populous democracy with well established multi-party politics and
robust institutions (including a strong and active civil society, estimated at 30,000
groups). It is also hostage to causes and conflict generated by left wing extremists
and armed revolutionary groups who are prevalent in vast areas of the country
(156 districts and 13 states). India’s ruling parties come and go, undermined by a
fractious legislature and corruption, and lasting rarely long enough to make
needed changes. However, expectations are strong and widely-held that the
current coalition government under Manmohan Singh will prove an exception.
The ruling government is an alliance led by the Congress Party and consisting of
three smaller entities. It has the support of four communist parties, known as the
“Left Bloc” which is vital to the effectiveness of the ruling coalition. As with China,
the massive proportion of India’s population resides in the rural countryside. This
population forms the backbone of popular support that helped elect the Congress
Party in the last elections. They are a major source of domestic pressure for higher
living standards and integration into the mainstream economy.
Also like China, India’s economic growth has primarily benefited urban areas. The
pressures of rising expectations among rural and farm populations are complicated
by left wing extremism (Maoists) and separatist insurgencies which have existed
for decades in India, and are again on the rise. Their demands range from
autonomy to claims for a greater share of the country’s natural resources. Nearly
600 people have been killed in skirmishes since January 2005; and the
government reported in March this year that the number of insurgency-related
killings had risen dramatically. Recently, the Maoist rebel groups merged into one
revolutionary organization, which is expected to increase its threat and fire power.
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India is also vulnerable to communal and religious protests that often erupt into
violence. Hindu Muslim riots in 2002 resulted in 1,000 deaths according to
government estimates. This May, 6 people were killed and 60 were injured in a
religious riot sparked by local authorities who had razed a 200 year old Sufi shrine
for a “road-widening project”
Among other measures to relieve social unrest, the Indian government has passed
a Common Minimum Employment program and a new quota system to increase
the numbers of poor and “backward” groups in higher education. The latter has
generated strong middle class opposition, especially among college students. This
will undoubtedly play into the claims of left wing groups, including extremists.
International affairs: China
Among the key drivers to China’s foreign relations are its quest to secure energy
assets and other raw materials; nationalism and China’s bid for regional
leadership; and containing the US Underpinning these efforts are China’s
engagement in international institutions, such as the WTO, and the United
Nations, where it is a permanent member of the UN Security Council; its bilateral
and multilateral treaties; and the growth of its defence program and its arms
industry.
China’s relationships with African countries reveal a singular focus on securing
new markets and assets to support China’s economic growth. It has pursued
bilateral treaties, with countries like Zimbabwe, Sudan and Angola for oil and
mineral rights and for the sale or supply of Chinese arms. It provides aid and
economic support with few conditions, such as the safeguards imposed by the
World Bank to promote good governance and combat corruption. These
relationships bring added benefits to China in the form of allies who support
China’s positions in international forums; such as the United Nations and the UN
Human Rights Council.
China’s regional relationships are framed by its nationalist sensitivities and its goal
of being the strategic leader in the region. Both Japan and Taiwan provoke China’s
strong sense of nationalism. Cross-strait relations have been subject to tensions
produced by China’s continuing claim on Taiwan as its province. In 2005, China
passed legislation that codified the possibility of using force if Taiwan claimed
independence. However, in a move designed to isolate the Taiwanese leadership,
China is successfully courting Taiwan’s business community and the opposition
KMT party, and is dissuading governments like the US from receiving state visits.
These moves signal a change toward non-military stratagems and reduced
tensions in cross-strait relations.
China’s political relations with Japan are troubled by wartime history and Japan’s
past atrocities, their competition for the leadership of Asia, Japan’s close ties with
the US, and its increasing rivalry for energy supplies. An outstanding issue in the
oil and gas rivalry between the two countries is the ultimate destination of the new
Russian pipeline from Siberia to the east: whether the terminus will be in Japan or
in China. Despite strong commercial ties, competition and mistrust will continue to
prevent Sino-Japanese relations from consolidating into a regional alliance.
In 2003, China surprised much of the world with decisive action and leadership in
the North Korean nuclear crisis. It suspended oil shipments to North Korea, sent
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envoys, and shifted troops along the China-Korean border. Since then, China has
been the lynchpin in the on-going 6-party talks. Not only because of its leverage on
North Korea as the major donor and ally, but also because of the implications for
the regional balance of power, China can be expected to play a pivotal role in the
talks and influence their ultimate outcome. Elsewhere in the region, China is
strengthening its ties with the ASEAN countries through bilateral and multilateral
pacts, even as their economies become increasingly tied with China’s.
In the Indian sub-continent, China seems more focused on maintaining the current
regional political alignment, devoid of changes that would contain China. It is a
traditional ally of Pakistan and a major arms supplier for the country. It maintains
close ties with the Myanmar government. Although it is currently not a challenger
to China’s bid for Asia’s leadership, India is an important power in the region, and
the relationship of the two countries is important to regional stability.
International affairs: India
While the ties between India and China are currently stable and reinforced by
developing commercial ties, the risks to the relationship are noteworthy: with its
affiliations with the West, India could be seen a proxy for western interests to curb
China’s influence in the region. China and India fought a border war in 1962 that
left an unresolved border dispute that could emerge as a major irritant in the
relationship. Most significantly, India signed a ground-breaking civil nuclear
cooperation agreement with the US this year. If seen by China as an attempt at
political realignment in the region, it could decide to rebalance the situation by
assisting Pakistan with its nuclear weapons program. As has been expressed in
various quarters, this could start a destabilizing nuclear arms race on the subcontinent.
While the economies of east and south east Asian countries are increasingly tied
to China, the same cannot be said with regard to India. This has a bearing on
India’s influence in the region. While it is a giant among emerging markets, its
political influence in the region is not commensurate with its stature. India’s
regional concerns may be best seen in the context of issues presented by
Pakistan and Nepal.
Border security and Kashmir figure prominently in its relationship with Pakistan.
Having fought a war and border skirmishes, India also worries about China’s
interest in assisting Pakistan’s nuclear arms program and about its defence
agreement with China. However, the two countries have undertaken confidence
building measures (which Pakistan believes are not enough). In Nepal, the Indian
government seeks to impede interaction between its own Maoists and those of
Nepal in order to prevent the formation of a zone of political instability and guerrilla
activity, spanning Andra Pradesh to Bihar. Through contacts established by the
members of the Left Bloc, the government has attempted to shore up
parliamentary rule and to bring Nepali Maoists into mainstream politics.
Geopolitics
In global politics, China is emerging as a military power with closer ties to Russia.
China’s military build-up has been formidable and suggests that it is second only to
the US in defence spending. By official reports of the Chinese government itself,
the defence budget has grown 10% annually for the last 15 years and by 300% in
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Emerging Market Analysis & Multilateral Organisations
real terms. However, these official figures are widely taken as false estimates of
the true level of China’s military spending. A study released recently by the
International Institute for Strategic Studies, UK, estimates that China actually
spends 70% more, or USD 75.5bn (in purchasing power parity) for 2003. As China
is a nuclear power, we may assume that the spending includes the modernization
of its nuclear forces. In addition to its own defence build-up, China is a major arms
supplier, providing conventional and advanced weaponry to countries worldwide,
including those that are major conflict zones, such as Sudan.
China is also developing closer ties with Russia based on common energy
interests and a shared interest in counterbalancing American power. The two
countries recently signed major energy accords for large scale shipments of
Russian gas to China through the construction of new gas pipelines. Another, a
resolution on a crude oil pipeline from Siberia is still pending. Both countries dislike
American interference in internal affairs and would like to see American power in
check. In 2005, China and Russia held their first joint military exercise in a show of
“strategic partnership”. In the Iran nuclear crisis, they have been coordinated in
their response against American calls for sanctions.
China’s political relations with the US itself are often troubled. It sees America as a
de-stabilizing force in global politics, and undoubtedly wants to curb US power,
particularly its influence in Asia. The U.S has urged China to be a responsible
stakeholder in the global community and China has answered with a doctrine
expressed as the “peaceful rise of China”. Notwithstanding these considerations,
both countries are ultimately pragmatic, and their strong commercial and trade ties
may prove resistant to politics.
India is a less prominent player than China in global politics, and less also by its
previous role in the cold war when it served as the leader of the non-aligned
nations. It currently exercises its regional and international weight as a rising
economic power through trade and economic channels. It shares the leadership
with Brazil for the G20 nations. It has made a bid for membership in the UN
Security Council. Its nuclear cooperation agreement with the US has given India
new status, and it is proceeding with a defence build-up, commensurate with its
rising status as an emerging economic power. However, for the moment at least,
India remains largely unheard in the geopolitical manoeuvrings related to issues,
such Iran’s nuclear programme.
Summing up
In summary, China’s emergence as a pivotal player in international affairs can be
seen as a transformative development for geopolitics. As a start with Russia, but
later on its own, China will be a centre of power in the global balance of power. Its
influence, as suggested by some of its current bilateral relations, may not always
be benign nor socially and politically progressive. In fact, it could bring a shift in the
global trend towards improved governance, civic rights and environmental and
social accountability.
The dynamics of a transition economy of China’s immense size, scale, and
complexity, also carry inherent vulnerabilities that could complicate China’s
expressed intentions to be a global power with peaceful aspirations.
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India for all its internal troubles remains a democracy with robust democratic
institutions and legal structures rooted in western liberal thought and
jurisprudence. As a rising Asian economic power, India has the singular potential
to be a strong progressive influence in world politics. It seems currently distracted
by its internal struggles and its economic interests. It may be some time before
India steps up to the plate to exert its influence in world politics.
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Chapter 5:
Trade and FDI opportunities for the Netherlands
This chapter examines the development of FDI and foreign trade of the two
countries and make projections for the period up to 2020. Additionally, it looks at
the economic relations of the two countries with the Netherlands.
The projected growth path for the two economies
GDP
% y-o-y
9
8
7
6
5
4
2006
2010
2014
2018
India (AAB forecast)
China (AAB forecast)
—— India (EIU forecast) —— China (EIU forecast)
Since FDI and foreign trade projections are closely related to the expected growth
path of the economy, our assumptions are based on the growth trajectory of the
two countries for the period ahead up to 2020. We take the Economist Intelligence
Unit (EIU) long term growth projections for the two economies as our starting point.
In accordance with the EIU, we expect the two economies to slow down in the
coming period and we share its opinion that, from 2013 onwards, India’s growth
rate will outpace that of China. This projection is based on a number of factors.
Compared to China, India has a more balanced growth: a strong and growing
internal demand combined with external demand which is gaining importance.
China, on the other hand, remains too dependent on its export-led growth model.
However, regarding the expected slowdown of the two economies, our projections
diverge considerably from the EIU. As shown in the graph, the EIU expects the two
countries, especially China, to slowdown substantially, dipping to growth rates of
4.5%, which is less than half the current growth rate. For China’s economy, this
could more or less be considered to be a landing: the growth rate is insufficient to
create enough jobs in order to absorb its growing work force, which will only start
to decline after 2020.
We also expect China’s growth rate to come down more quickly than that of India.
However, we expect the growth rate to stabilise around 6% in the period up to
2020.
Foreign investment: opportunities for the Netherlands
The past
The influx of FDI in China has attracted a great deal of attention in the past
decades. In the period 1990-2005, China attracted an average FDI influx of USD
33 billion per annum. By comparison, India has attracted an average FDI inflow of
less than USD 3 billion per annum for the same period, indicating an average of
3.5% and 0.6% of GDP for China and India, respectively.
It should be noted that the foreign investment boom in China was started by
overseas Chinese. From 1985 to 1996, two-thirds of FDI in China came from Hong
Kong, Macau and Taiwan, where about 30 million ethnic Chinese live, many of
them with close ties to the mainland. Moreover, these places specialised in labour
intensive manufacturing industries for export. Because of fast rising labour costs,
manufacturing operations were moved to coastal China. Overseas Indians, in
contrast, are scattered around the world and across professions.
The future
As stated previously, average FDI inflow in China was 3.5% of GDP for 19902005. However, as shown by the next graph, this very high number mainly
reflected high inflows in the second half of the nineties. Since then, the amount of
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Emerging Market Analysis & Multilateral Organisations
FDI as a percentage of GDP is on a declining path. We think that this trend will
continue in the period ahead, for two reasons. First, the importance of FDI in total
investment is declining in China. Given its enormous savings rate the country has
ample resources to finance its own investment. The share of FDI in total
investment declined from 16% in 1994 to 6% in 2004. We are of the opinion that
this trend will continue in the period ahead to 2020. Secondly, the country is
experiencing over-investment, which will have to be corrected in the period ahead.
This will slow down the investment growth in the country, and, therefore, the FDI
inflow.
FDI in China
% GDP
7
6
5
4
3
2
1
0
1990
1994
1998
2002
Dutch FDI in China, 1990-2005
USD million
400
300
200
Taking the above as a starting point, we project an average influx of FDI in China
to be 1.5% of the GDP in the period up to 2020. As seen in the next table, the
enormous size and growth of China’s GDP means that the absolute amount of FDI
will continue to grow, reaching USD 82.0 billion in 2020. During 1990-2005, the
Dutch share averaged 0.4% of total FDI in China. We assume that this percentage
will stay the same in the period up to 2020. Therefore, Dutch FDI to China will
average around USD 222 million during the period 2006-2020. Compared to an
average of USD 128 million in the period 1990-2005, this represents a jump of
USD 94 million on an average yearly basis.
100
Projected inflow of foreign investment in China
0
GDP (USD bn)
Total FDI (1.5% of GDP)
Dutch FDI (0.4% of total)
2006
2239.3
33.6
0.134
2007
2423.0
36.3
0.145
2008
2614.4
39.2
0.156
2009
2810.4
42.2
0.168
2010
3010.0
45.1
0.180
2011
3205.6
48.1
0.192
2012
3410.8
51.1
0.204
2013
3625.7
54.4
0.217
1.0
2014
3850.5
57.8
0.231
0.8
2015
4085.4
61.3
0.245
0.6
2016
4330.5
65.0
0.259
0.4
2017
4590.3
68.9
0.275
0.2
2018
4865.7
73.0
0.291
2019
5157.7
77.4
0.309
2020
5467.1
82.0
-100
-200
1990
1994
1998
2002
Average yearly inflow: USD 128 million
FDI in India
% GDP
1.2
0.0
1990
1994
1998
2002
0.328
Total
835.3
Total
3.3
Average
55.3
Average
0.222
As stated above, India attracted far less FDI during the same period, 1990-2005.
However, the liberalisation of the economy at the start of this millennium has
boosted not only the growth rate of the country but also its foreign trade and the
influx of FDI. As seen in the next graph, FDI is on the increase as a percentage of
the GDP. We think this trend will continue in the period ahead, especially since
India will open up its banking system to foreign banks in 2009. This will have an
additional positive effect on the influx of FDI into the country. Our projection is that
the FDI, as a percentage of GDP, will average 1% in the period 2006-2020.
Based on this projection, FDI inflows into India will almost reach USD 21 billion by
2020. We do not foresee any change in the percentage of Dutch FDI for the period
ahead, however. On average, Dutch investment represented 5.4% of total FDI in
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Emerging Market Analysis & Multilateral Organisations
Dutch FDI in India, 1990-2005
USD million
300
250
200
150
100
50
0
-50
India for 1990-2005. Our assumption is that this percentage will stay the same for
the period up to 2020. Therefore, Dutch FDI to India will average around USD 727
million during the 2006-2020 period. Compared to an average of USD 84 million
during 1990-2005, this represents a jump of USD 643 million on an average yearly
basis (see following table).
Projected inflow of foreign investment in India
1990
1994
1998
2002
Average yearly inflow: USD 84 million
GDP (USD bn)
Total FDI (1.0% of GDP)
Dutch FDI (5.4% of total)
2006
860.8
8.6
0.464
2007
916.8
9.2
0.495
2008
979.1
9.8
0.528
2009
1043.7
10.4
0.563
2010
1112.6
11.1
0.600
2011
1185.0
11.8
0.639
2012
1260.8
12.6
0.680
2013
1340.2
13.4
0.723
2014
1424.6
14.2
0.769
2015
1514.4
15.1
0.818
2016
1609.8
16.1
0.869
2017
1711.2
17.1
0.924
2018
1819.0
18.2
0.982
2019
1933.6
19.3
1.044
2020
2055.4
20.6
1.109
Total
Average
207.7
13.8
Total
Average
11.6
0.727
Foreign trade: opportunities for the Netherlands
China
As stated in the opening chapter of this study, China has had an enormous and
singular impact on global trade flows. In the period 1990-2005, China increased its
foreign trade by an average of 20% per year, which reached 68% of its GDP last
year, up from 24% in 1990: In other words, an increase of 44 percentage points.
We believe that foreign trade will continue to expand in China. However, the
expansion will be less pronounced in comparison to the growth of the past fifteen
years. There are several reasons for this. First, we forecast a gradual slowdown of
the Chinese economy in the period ahead. This will have a dampening influence
on imports (into the country). In view of the fact that the Asian region is already
considered to be China-centric, a declining import demand from China will, in time,
have an dampening effect on the exports of the countries in the region, and
therefore, on the growth of the countries themselves. This will, in turn, influence
Chinese exports to these countries.
Yuan against USD
8.30
8.20
8.10
8.00
3-1-2005
17-5-2005
28-9-2005
9-2-2006
Secondly, there is the issue of the Chinese currency. The government has been
keeping the currency artificially low to stimulate exports, causing a good deal of
commotion in the rest of the world, especially in the US In response, the Chinese
authorities moved from a straight peg against the USD to a basket of currencies
last year. Thus far, the move has had very little impact on the value of the
currency. Therefore, pressure for an upward valuation will continue, especially
from the US. The issue has to be resolved in the future. Chinese exports cannot
continue to expand as they have in the recent past, without provoking protectionist
measures from other countries, particularly the US. This may not lead to an
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Emerging Market Analysis & Multilateral Organisations
Volume of Chinese foreign trade, 2006-2020
Total trade
As argued in the text the total foreign trade volume of China
will increase to 90% of GDP in 2020. This equals USD 4920.4
billion in 2020 (90% * 5467.1).
Dutch share
In the period 1990-2005, the average Dutch share of trade in
the total Chinese trade was 1.6%. We take the assumption
that in the period 2006-2020 this market share will remain the
same. In 2020 the Dutch foreign trade with China could
increase to USD 78.7 billion.
Dutch exports
In the period 1990-2005, the share of Dutch exports of the
total Dutch trade with China has structurally declined from
21% in 1990 to 9% in 2005. However, the past years the
decline somewhat levelled off. We take the assumption that in
the period 2006-2020 the share of Dutch exports in the total
trade with China will stabilize around 8%.
This implies that Dutch imports from China will increase to
USD 72.4 billion and exports to 6.3 billion in 2020. See graph
below.
7
6
5
4
3
2
1
0
2006
2010
2014
2018
% total Dutch imports
8
6
4
2
0
1970
1980
1990
Lastly, the political leaders of China have stated on several occasions that they
want to support internal consumption to reach a more balanced growth and
become less dependent on foreign trade. Given this desire and the accompanying
policies, we think that internal private consumption will, in time, play a bigger role
in China’s GDP. However, it will be an uphill battle for China’s political leaders to
accomplish this, because making policies is one thing, implementing them is
another, especially in a country of China’s tremendous size and scale.
Taking these considerations into account, we project foreign trade, as percentage
of GDP, to increase to 90% in 2020. This is half the increase of the past fifteen
years and equals an increase of almost 250% of total trade up to 2020. In
accordance with the rise of total Chinese trade, Dutch trade with the country will
also increase considerably (see box).
India
Compared to China, foreign trade in India showed a less tempestuous
development in the past decade. The average increase in total trade was just 13%
per year, and the share of total trade reached only 28% of GDP last year, up from
13% in 1990. However, foreign trade recieved an enormous stimulus after trade
liberalisation at the beginning of this decade. The yearly increase averaged almost
25% during the last four years.
Looking at the future, we have made several considerations. First, comparing the
average GDP growth rates of the past fifteen years with our projections up to 2020
for the two countries, we anticipate India’s foreign trade development to be about
the same, on average, as the last fifteen years´. The projected average growth for
India up to 2020 is 6.5%. The average growth in the period 1990-2005 was 6%. By
comparison, we saw that the average growth for China in the past fifteen years
was almost 10%, whereas we project an average growth of 7% in the period up to
2020. This is a significant deviation from the past.
Dutch imports form China
1960
immediate strong revaluation of the yuan, but a correction over a longer period
with visible revaluation cannot be ruled out. This process will have a dampening
effect on China’s foreign trade, especially exports. Reduced export growth will of
course influence the growth rate of the country, which will then lead in turn to less
import demand.
2000
Second, we see two opposing forces that could influence India’s foreign trade. On
the one hand, as noted before, India’s foreign trade recieved an enormous
stimulus in the last four years because of trade liberalisation. We think that this
trend will continue in the period ahead. This will have a positive impact on foreign
trade. The increase of foreign trade as a percentage of GDP could therefore be
higher than the 15%-points increase in the period 1990-2005.
On the other hand, as we explained in an earlier chapter, the infrastructure of the
economy is already perceived as an impediment to growth and especially to
foreign trade. Unless the government is able to deal with this situation and turn it
around, the problem will become even more acute, damaging foreign trade and
denying the same increases as in the past.
Given the growing economy and the government’s expressed priority to upgrade
the country’s physical infrastructure, we believe that the situation will gradually
improve, becoming accommodative to trade instead of being an impediment. How-
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Emerging Market Analysis & Multilateral Organisations
Volume of Indian foreign trade, 2006-2020
Total trade
As argued in the text the total foreign trade volume of India
will increase to 43% of GDP in 2020. This equals USD 883.8
billion in 2020 (43% * 2055.4).
Dutch share
In the period 1990-2005, the average Dutch share of trade in
the total Indian trade was 1.5%. We take the assumption that
in the period 2006-2020 this market share will remain the
same. In 2020 the Dutch foreign trade with India would
increase to USD 13.3 billion.
ever, because of the long lead times in infrastructural projects, this will take some
time. Thus, in the short to medium term the low quality of the infrastructure could
take a big bite out of foreign trade, but in the long run an upgraded infrastructure
will boost foreign trade. In sum, we project foreign trade to reach USD 883 billion
in 2020, and foreign trade as a percentage of GDP to increase at the same pace,
on average, as in the past. (see box).
Dutch exports
In period 1990-2005 the share of Dutch exports as
percentage of total Dutch trade with India came down from
56% in 1990 to 41% in 1993. After 1993, this number has
varied around 40%. For the period 2006-2020, we take the
assumption that the share of Dutch exports as percentage of
total Dutch trade with India will on average remain 40%. This
implies that the Dutch imports from India will increase to USD
7.9 billion and exports to USD 5.3 billion in 2020. See graph
below.
6
5
4
3
2
1
0
2006
2010
2014
2018
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Emerging Market Analysis & Multilateral Organisations
Disclaimer
The information opinions, forecasts and scenarios contained in this publication have been
compiled or arrived at by ABN AMRO Bank N.V. from sources believed to be reliable and in
good faith, but no representation or warranty, express or implied, is made as to their
accuracy, completeness or correctness. All opinions and estimates contained in this
publication constitute ABN AMRO Bank N.V.’s judgement as of the date of this publication
are subject to change without notice. ABN AMRO Bank N.V. accepts no liability whatsoever
for any direct or consequential loss arising from any use of this publication or its contents.
The content of this report may be quoted without further permission, but due
acknowledgement is requested.
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May 2006