Will the weakening Chinese dragon strengthen the India Bulls?
Chinese economy and the strengthening Indian economy. The ramifications of this shift are already visible in foreign portfolio flows to the two economies and the contrasting performances of the two stock markets. From the investors’ perspective, the relevant questions are:
Are these shifts structural?
What are the factors driving these profound changes?
What are the implications for investors?
The $19 trillion Chinese economy is decelerating fast.
There are some fundamental issues dragging the Chinese growth down. China’s population has peaked and has started declining. An economy with a declining population cannot sustain long-term growth above 3 percent.
This is a lesson from economic history.
Apart from this demographic shift, the Chinese economy is suffering from serious problems in the real estate sector. The property market, accounting for around 30 percent of GDP, has been the driver of growth in China for many years.
Housing starts have declined by 21 percent this year and youth unemployment has shot up to an alarming 20 percent. China has been trying to move away from investment-led growth to consumption-led growth; but the strategy has not succeeded, so far.
Consumption remains stuck at 40 percent of GDP.
Chinese debt-to-GDP, which is at an alarming 287 percent, leaves little room for fiscal stimulus. In brief, growth in China is likely to remain anemic for many years.
Some pessimists are even talking about the Japanification of the Chinese economy. Apart from this, the anti-business policy being followed by the Xi Jinping regime and the harsh regulatory controls have queered the pitch for the Chinese stock market.
Shanghai Composite Index is now at 3200, lower than the March 2007 level.
