Wednesday, January 11, 2012

Why India is riskier than China

China and to a lesser extent India are positioned to meet challenges resulting from the downturn in the world economy.

New Haven, Connecticut - Today, fears are growing that China and India are about to be the next victims of the ongoing global economic carnage. This would have enormous consequences. Asia's developing and newly industrialised economies grew at an 8.5 per cent average annual rate over 2010-11 - nearly triple the 3 per cent growth elsewhere in the world. If China and India are next to fall, Asia would be at risk, and it would be hard to avoid a global recession.

In one important sense, these concerns are understandable: both economies depend heavily on the broader global climate. China is sensitive to downside risks to external demand - more relevant than ever since crisis-torn Europe and the United States collectively accounted for 38 per cent of total exports in 2010. But India, with its large current-account deficit and external funding needs, is more exposed to tough conditions in global financial markets.

Yet fears of hard landings for both economies are overblown, especially regarding China. Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts. There are also concerns about frothy property markets and mounting inflation.

While none of these problems should be minimised, they are unlikely to trigger a hard landing. Long fixated on stability, Chinese policymakers have been quick to take pre-emptive action. Read More