India and China: A Reversal of Economies?

India's Prime Minister Narendra Modi (L) shakes hands with China's leader Xi Jinping before the G20 leaders' family photo in Hangzhou, China, on Sept. 4, 2016. Greg Baker/AFP/Getty Images

“Investing in communism never works,” investor and hedge fund executive Kyle Bass recently told CNBC.

China, the world’s second-largest economy, is grappling with various headwinds that could lead to long-term headaches.

Beleaguered real estate developer China Evergrande Group reminded domestic and global financial markets of Beijing’s debt challenges.

A Hong Kong court ordered the liquidation of Evergrande, the world’s most indebted company, with roughly $330 billion in liabilities. Nearly two years after defaulting on its debt, Hong Kong Justice Linda Chain ruled “enough is enough” as the entity had failed to submit resolutions, provide efficient communications, or complete restructuring efforts.

“It seems to me that the interests of the creditors will be better protected if the company is wound up by the court, so that independent liquidators can take control over the company,” Ms. Chain stated in a landmark ruling.

Evergrande’s shares halted trading after collapsing more than 20 percent due to the high court’s ruling.

The decision came as the broader financial markets have been in the doldrums.

Over the last year, the Shanghai Composite Index has tumbled around 15 percent, and the Hang Seng has plummeted close to 30 percent.

Since hitting their peak three years ago, approximately $6 trillion has been wiped off Chinese and Hong Kong stock markets.

Authorities have taken notice, prompting the China Securities Regulatory Commission (CSRC) to introduce new rules to limit short selling on specific securities.

The trading strategy, a process of betting a stock will fall by borrowing the asset and selling it immediately with the goal of repurchasing it later at a lower price and pocketing the difference, went into effect on Jan. 29.

However, volatility in the equities arena has been only one symptom of an underperforming economy.

China’s Economy

Data published throughout January depict a sluggish landscape for an economy poised to overtake the United States.

China has slipped into deflation amid slumping domestic demand, exports have been anemic, unemployment has inched higher, and GDP growth has been weaker than economists’ expectations. Additionally, manufacturing activity has contracted for nine of the last 10 months.

Experts believe Beijing will turn things around despite everything that has transpired by unleashing more significant stimulus and rescue measures.

The International Monetary Fund (IMF) published its latest forecasts for the global economy. Economists projected that China’s economy will grow by 4.6 percent in 2024 and 4.1 percent in 2025. They also warned that “deepening property sector woes ... could also cause growth disappointments.”

Commuters wear protective masks as they exit a subway station during rush hour on April 13, 2020, in Beijing, China. According to World Health Organization statistics, as of today, the number of confirmed cases of COVID-19 has exceeded 1.69 million, including 106,138 deaths. Lintao Zhang/Getty Images

By comparison, the U.S. economy is anticipated to expand by 2.1 percent this year and 1.7 percent in 2025.

One ING economist is bracing for more state support.

“While we have seen numerous piecemeal supportive policies targeting specific sectors released over the past few months, which have helped stabilize growth somewhat, markets are looking ahead to the Two Sessions in anticipation of a larger-scale policy package,” said Lynn Song, the chief economist for Greater China at ING, in an analyst note.

The 50-basis-point reduction to the reserve requirement ratio, or RRR, last week “could be seen as a signal of more significant supportive policies ahead,” Mr. Song added.

But can China afford to employ more stimulus and rescue measures? The nation’s mountainous debt is impacting every level of government, raising the debt-to-GDP ratio to an all-time high of 286 percent last year.

In December, Moody’s Investors Service adjusted its outlook for China’s debt to “negative,” alluding to high debt levels among regional and local governments amid slowing growth rates.

“The change to a negative outlook reflects rising evidence that financial support will be provided by the government and wider public sector to financially stressed regional and local governments and State-Owned Enterprises, posing broad downside risks to China’s fiscal, economic, and institutional strength,” the agency said in a report.

“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector.”

While the international community observes an economic powerhouse that is on a potential decline, everyone is witnessing the rise of another Asian nation: India.

The Rise of India

India’s Ministry of Finance projects that the country’s economy will grow at or above 7 percent in 2024 and 2025 and become the world’s third-largest economy by 2027, with a GDP of $5 trillion.

“The government has, however, set a higher goal of becoming a ‘developed country’ by 2047,” said V Anantha Nageswaran, India’s chief economic adviser, in a government report. “The robustness seen in domestic demand, namely, private consumption and investment, traces its origin to the reforms and measures implemented by the government over the last ten years.”

India is currently the fifth-largest economy, behind Japan and Germany.

Reserve Bank of India chief Shaktikanta Das also supported the government’s growth forecast, referencing the “strong momentum of economic activity seen” in his country.

Economists and market experts are both optimistic and cautious.

“It’s definitely possible” that India could become the world’s third-largest economy, says Vijay Marolia, a managing partner and chief investment officer of Regal Point Capital and founder of Dharma Investing, telling The Epoch Times that it is “theirs to lose” at this point.

“As long as they keep doing what they’re doing, and they focus on their strengths, if they go around their weaknesses, they can get it accomplished,” Mr. Marolia said.

He further explained that it is challenging to find another country that is as developed, growing as fast, and based on the British common-law system, adding that India’s growth would be a boon for the global economy.

“Centrally planned economies like China are not ideal for the rest of the world,” Mr. Marolia stated.

Economists assert that India’s meteoric ascent has been a mirror image of what China experienced in the late 1990s and early 2000s.

Factory activity has been robust at a time of slumping international trade. Exports have exceeded pre-pandemic levels. Productivity levels have ballooned over the last decade. Investments have also been substantial and are expected to be solid over the next several years.

“High aggregate rates of investment in China are set to decline from the 40+ levels over the last two decades—and Indian investment levels to increase from the 30+ levels. In China, housing sector investments are a drag; in India, public infrastructure investments are a huge plus,” wrote Surjit Bhalla, a former executive director at the IMF, in a Brookings Institution analysis.

“Higher investment rate will add approximately 0.75 percent per annum growth for India; lower investment rate will subtract approximately 0.75 percent per annum growth for China.”

Indeed, China has been experiencing higher capital outflows over the past year amid geopolitical concerns, trade strife, and fears over government interventions.

S&P Global and JPMorgan Chase also believe India is on track to become the third-largest economy in the world by 2030.

“India is set to become the third-largest economy by 2030, and we expect it will be the fastest growing major economy in the next three years,” S&P stated in its Global Credit Outlook 2024 report. “A paramount test will be whether India can become the next big global manufacturing hub, an immense opportunity.”

In a separate report, S&P Global noted that “India is set to be the fastest growing economy in the G20 grouping of large nations.”

JPMorgan argues that the nation’s demographics are supportive of its “favorable growth prospects.”

“The country recently overtook China as the most populous nation in the world, and its young, skilled, low-wage workforce is the envy of the world,” the bank wrote.

Despite growing optimism, HSBC economists do not believe India will topple China as the global economy’s primary growth engine.

“The numbers don’t exactly add up,” economists Frederic Neumann and Justin Feng stated in an October 2023 research note,“ adding that the country ”runs on too few cylinders“ and that China is ”simply too large to have its importance for the world economy readily eclipsed.”

Today, China’s GDP is roughly $17 trillion, so India will have a long way to go. Still, experts think the opportunity exists for India to unseat other leading countries, be it Japan or Germany.