Chinese Century? Not So Fast

http://www.iht.com/articles/2005/02/14/bloomberg/sxpesek.htm

INTERNATIONAL HERALD TRIBUNE

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-terminvestment 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 directinvestment.

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'tentered 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, havealtered 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 impactglobally will unfold on a much larger scale.

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 billionsof 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 theCommunist 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 andrunning.

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 theskills to enter India's software and call-center industries.

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 rightsand 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 aGeneration from now. It may not be the one they think.