Welcome to the Chinese century? Not so fast



Commentary: Welcome to the Chinese century? Not so fast
By William Pesek Jr. Bloomberg News

Tuesday, February 15, 2005

Everyone has an opinion on who will lead Asia in the years ahead,
including the Group of 7 industrial nations. This month, the group
clearly seemed to be putting its money on China.

The wealthiest industrialized nations have not exactly said that India
will play second fiddle to China, having invited both nations to
attend their Feb. 4 meeting. Yet the G-7’s almost linear focus on
China and its currency policy leaves little doubt about which country
it is betting on. The same is true for the policy-making elite who
gathered at the World Economic Forum in Davos, Switzerland this year.

All this matters because the G-7 is realizing that Asian nations’
economic might will one day rival or even eclipse its own. This
region, after all, is home to many of the world’s most vibrant
economies, ones that will increasingly alter the G-7’s clubby way of
viewing the global financial system.

Markets also are trying to digest recent investment bank reports
arguing that China and India will become the world’s second- and
third-biggest economies sooner, rather than later. In the age of
globalization, size matters more than ever; the bigger the economy,
the more long-term investment it seems to attract.

As bond and stock markets in the two Asian giants grow along with
gross domestic product, G-7 members may have a harder time remaining
on investors’ radar screens.

Yet G-7 ministers and investors should think twice before downplaying
India’s potential relative to that of China.

China is the heir apparent, according to conventional wisdom. Its 9
percent pace of expansion is largely responsible for Asia’s rapid
economic growth in recent years. It is the world’s leading destination
for foreign direct investment.

Yet Daniel Lian, a Singapore-based economist at Morgan Stanley, can
think of at least two reasons to be optimistic about India.

First, economic forecasters have a poor record of predicting the next
economic megatrend. Second, India could spring a few surprises that
haven’t entered the calculations of global investors.

Remember how everyone assumed that Japan would lead the so-called
Pacific Century? The decline of Japan’s economic might, however, along
with China’s rise since 1994 and the collapse of the Asian tiger
economies in 1997, have altered the dynamics for this century.

It is not clear to what extent the rest of Asia will be able to
compete with China’s low wages and growing market share. The
phenomenon is not unlike how Wal-Mart Stores is shaking up the U.S.
economy – only China’s impact globally will unfold on a much larger

Another big question is the fate of China’s banks, which have been
undermined for decades by an institutionalized misallocation of
capital with little regard for international norms of risk management
and the extension of credit. Rating agencies think it will cost
several hundreds of billions of dollars to resolve their bad loans.

Enter India, which has a measure of economic and political stability
that will take China years to develop.

Hovering constantly above China’s economy is the question of whether
it can complete the transition from socialism to capitalism – and
whether the Communist Party can hang on to power.

India, for all its warts, is not preoccupied by such risks. Its
troubles include a massive national debt, a daunting poverty rate, an
inefficient and bureaucratic government and ramshackle infrastructure.
Yet India’s entrepreneurial vigor, as seen in companies like Infosys
Technologies, Dr. Reddy’s Laboratories and Wipro, is more impressive
than China’s.

India’s financial markets are also more developed. China, unlike
India, does not have much of a bond market, for example. Indian
companies have big head start and a significant advantage when it
comes to raising capital in the debt markets. What China must build
from scratch, India already has up and running.

A big push into export-oriented manufacturing also is under way in
India. While China is clearly ahead on that count, India’s efforts
could contribute significantly to poverty reduction, by creating jobs
for those without the skills to enter India’s software and call-center

Western investors, says Lian at Morgan Stanley, ultimately could favor
India over China. Reasons include India’s well-established democracy,
the belief that the nation is better equipped to protect intellectual
property rights and fear of China as a geopolitical competitor.

Yes, China has vast potential, but so does India. You would think that
the G-7 would be hedging its bets on which economy will dominate Asia
a generation from now. It may not be the one they think.

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