STOCK MARKET AND GDP GROWTH POST GLOBAL RECESSION A COMPARATIVE STUDY ON CHINA & INDIA, PART-I : ECONOMY

‘CHINDIA’ – OVERVIEW OF ECONOMIC INDICATORS

GDP Growth Trajectory

  • China and India grew economically (beyond average global growth rate )after liberalization. But whereas in China the liberalisation commenced in late 70s, in case of India, it started more than a decade later ie: in 1991.
  • This obviously resulted in China ramping up its GDP at much faster pace and in the process, leaving initial far behind within 3 decades, as depicted below.
  • From the above, it can be seen that while China’s economy grew at a CAGR of ~ 10.5 % between 1980 and 2016, the corresponding growth for India has been ~ 7.2%.
    The cumulative effect is that while China’s economy was in the vicinity of 1 ½ times that of India’s, by 2016, it had reached more than 5 times.
  • Of course, the ‘first mover’ advantage is just one of the factors which propelled China to exponentially grow its economy; in fact, the wave of globalization picked up after 1980’s together with an authoritarian regime which wanted to take economy forward at ‘any cost’ also amply helped China towards the growth it has achieved.

Population Growth

  • By far, one significant factor  that may have helped China grow it economy leaps and bounds were strict population control.
  • It can be seen from the chart below that while India added  about 620 million people from a base of 700 million in 1980, during the same period china’s addition from a base of 980 million was just 400 million ie: Against a CAGR of 1.75% in India, Chinese population growth was just about 1%.

Commercial  Geography

  • Abundance of diverse natural resources especially minerals is another factor which normally contributes to economic growth.
  • Natural Resources:
    Following are the comparative list of major natural resources
  • Though China has both coal and iron ore sources within the country, it was importing both in order to meet the difference between dean and domestic supply.
  • While India is also blessed with abundance of diverse natural resources, the ‘conversion rate’ to value added products have been far lower when compared to China.
  • Here, it is pertinent to mention that while both India and china has abundant iron ore reserves, India has been exporting iron ore to China since India is not able to consume the mineral for ramping up steel production, owing partly to substantial capex required for setting up incremental capacity and partly owing to far lower domestic demand for steel.
  • Industry
    Manufacturing/Processing industry accounts for about 50% in China’s GDP whereas it is a tad below 25% in India. The list of major industries is tabulated below for a comparison:

General Infrastructure

  • In general, India is far behind in infra when compared to China across all fronts – Power generation, Port capacity, Express highways etc.
  • Power generation: The comparative figures for power generation are shown below:
  • In fact, it can be inferred that China has added more capacity between 2010 and 2016 than the entire generation India has created post-independence.
  • Port capacity: Here again, China seems to be far ahead of India. Of the world’s largest 20 ports, 14 are in China whereas India does not even figure.
  • Expressways: This is by far, another front where there is hardly any comparison between China and India. Whereas India has managed to construct barely 1500 km during as many years, China has already built more than 100000 km.

Human Development Index(HDI)

  • HDI, is a composite index giving weightage to life expectancy, education and income levels. As per UNDP classification, HDI is considered ‘high’ in case of China with an index value of 0.738 whereas India is considered ‘medium’ with a value of 0.624. China’s figure goes with its status as a middle income country.

Inflation

  • The average inflation trend during recent years is shown in the following chart.
  • It can be seen that the inflation figures for India has been in the upper zone till 2014 primarily owing to high oil prices and its overall impact on economy.

TRADE

Import- Export

  • The primary difference between China and India in respect of trade is that whereas China has emerged as an export economy during past several years, India continues to be a trade-deficit economy.
  • It can be seen from the above that China’s figures for both export and import are an order of magnitude above that for India, besides being a trade-surplus country for most of the period during recent years.
  • Further, from a value-chain perspective, while India still has primary goods (agricultural products, minerals etc.) as bulk of export basket, in case of China, the lion’s share of export consists of manufactured goods.
  • It is pertinent to mention that the bilateral trade between India and China is heavily skewed in favour of China with average export from India in the vicinity of $US 10 B against an import figure around $US 60 B.

Forex Reserves

  • The impact of trade balances has been reflecting in the foreign exchange reserves of both the countries, as shown below:
  • In fact China holds the largest chunk of Forex reserves owing to its bulging export economy.

PERFORMANCE OF DOMESTIC CURRENCIES

Against USD

  • As of now both Chinese Yuan and INR are not considered convertible currencies. (both are only partially convertible for current account transactions).
    However, both have been used for localized transactions in selective manner in exigent situations.
  • In general, in line with the strengthening of economy, Yuan have been  getting stronger against world’s hard currencies over the years.
  • In case of INR, while a steady depreciation has been seen against USD,  the rate of depreciation when compared to a decade earlier has been slow especially in recent years. This is a reflection of the economy becoming more  resilient against external pressure.
  • These trends can be seen to be reflected below:
  • In order to get a representative picture of the movement, the chart has been prepared on a relative scale keeping 2010 rates as the base and assigning a value of 100 for both the currencies against the ruling rate against USD.
  • It can be seen that while INR has depreciated ~ 30% against USD during 2010- 2016 period, the Yuan is seen to have appreciated marginally during the corresponding period. In fact, in between – between 2013 and 2014 – yuan had appreciated as high as 10% against USD.

Against Euro

  • For comparison sake, the trend against Euro ( which has maximum weightage in dollar index) has also been plotted for both the currencies , as shown in the next chart.
  • It can be observed that :
    The yuan has appreciated significantly against Euro almost 20% from the 2010 base.
    In case of INR , while it has overall depreciated against Euro, the extent of depreciation is in the vicinity of 10% over the period. The trend of both the currencies against euro is partially in line with the weakening of Euro against stronger currencies like USD, partly owing to general slowdown of economies in Euro region post- recession and partly on account of higher risk perception about Euro region by the global investing community after the announcement of Brexit.

COSTOF CAPITAL

Equity Capital

  • Cost of equity – as against debt – varies in wide range primarily based on the risk perception. Hence , only a base level data would be possible to ascertain.
  • Since the financial ecosystem – form an investment perspective- operates on a global scale, the cost of equity is closely linked to the risk premium for the country.
  • Since a detailed treatise on this subject transcends the scope of this document, only a rudimentary treatment is being assigned here. Hence the data presented is confined to the trend of Equity risk premium for the countries based on data available in the public domain.
  • It is observed that :
    • The equity premium for India is marginally higher than those for China across the time window under consideration. This appears to be consistent with the gap in the respective country risk premia.
    • The margin between India and China appears to be consistent by and large.

Debt Capital

  • Technically, unlike equity, debt is a relatively safer instrument because there is a written down IOU document between the issuer and investor.
  • However, cost of debt capital ( interest) is not identical across all instruments.
  • The interest rate on a specific debt instrument depends on a multitude of factors like:
    • Primary macro-economic environment
    • Cost of debt prevailing for identically rated instruments
    • Credit quality of the issuer ie: past history etc. – this may inter-alia take the form of how long the business has been running as a going concern etc.
    • Any collaterals involved in the transaction
    • Prospective change expected in near/ medium term
  • The median interest rates for long term debt capital in India and China are reproduced in the following chart.
  • The chart above in general reflects the relative cost of debt in the respective countries.
  • In respect of India, in the recent past, the central bank ( Reserve Bank of India) has forced the banks to tweak the method of determining interest rates by ushering the MCLR( Marginal cost of capital based lending rates) regime. This was done to primarily to ensure transmission of monetary policies announced by the RBI to the end customers.

GROWTH PROSPECTS

China

  • Different Global / multi-lateral organizations – World bank, IMF, OCED and UN – have predicted different growth rates for China.
  • For the near term ( 2018- 2022), the upper range of growth projected is 6.5%, while the lower range is 5.8%.
  • As per OECD’s long term projection, China’s growth is expected to taper down from 5% to 3.5 % between 2020 and 2030 and then remain near flat for next 5- 6 years.

India

  • India’s growth prospects also appears to be along different numbers across the various global institutions.
  • In case of India, the impact of demonstration and Goods and Service tax roll out has compelled revision of GDP growth in view of fast changing scenario during the intervening period.
  • The upper range of growth projected is 8.2 %, while the lower range is 7.0% for the near term.
  • OCED’ s long term projection shows economy growing at sub-6% till 2015 and then taper down.
  • It is pertinent to mention here that the relative higher growth projected for India need to be read in conjunction with the base values of current GDP.
  • At current rate, for every 1% growth, China adds about 5 times economic value in view of the wide gap in the GDP figures.
  • In fact, China is projected to upstage US as the #1 economic power by 2032.

SASINDRAN AYADAKANDIYIL
CEO, ERGONOMIX INTELLECTUAL CAPITAL ASSETS
www.ergonomix.in

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