China and India can survive a bubble

Fri, 22 Jan Pre-Open

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One of the great things about investing is the range of thought it permits. An investor can focus on the quarterly earnings of a company. He or she could equally think about the fortunes of nations over the decades. The fortunes of entire countries ebb and flow with time. What were once superpowers become also-rans. Poor, struggling nations rise to prominence.

Interestingly, there are often parallels between the paths nations take to prosperity. Take the rise of China. The one economy the entire world is looking at. Its GDP growth seems to be unstoppable. Much like that of Japan in the late 1980s. Japan was tipped to become larger than the US. Today, the same prediction is made for China. The fundamentals are similar. People save a great deal. The currency is undervalued. The economy is driven by exports. There's a tendency to build excess capacity. Banks lend too much. Hence, many believe China might meet the same fate as Japan did when its bubble burst - decades of sluggish growth!

Interestingly, The Economist argues that China's case now is not as extreme as Japan's was then. China's stock market valuations and average property prices are nowhere in the same region as Japan's. As for overinvestment, it is more a case of being uneven. Yes, China has the world's ten longest bridges and the world's fastest train. But 40% of its villages are not connected by paved roads. The US was also growing fast in the 1910s and 1920s. China produces less steel per person now than the US did then. It also has a smaller railway network than the US did then. As for over lending by banks, much of it could be considered as fiscal stimulus. Something that was called for after the global financial meltdown.

Even if China were to crash, the fact that it is still a developing economy and not a developed one will help. There will be enough scope for adding capital goods, improving technology and increasing labour productivity. In fact, Japan, South Korea and Taiwan - all recovered from crashes when they were poorer.

In our view, the lesson applies equally well to India. Agreed that the Indian economy is a different beast than the Chinese economy. But we also have plenty to do. Yes, that means housing is scarce. The condition of our roads is pitiful. Public transportation is an everyday harassment. Few places have a steady power supply. But if and when we get around solving these problems, they will rev up the economy in a very productive manner. Oddly enough, that might act as insurance if our economic growth were to suddenly hit a roadblock.