China And India: Twin-Turbo For Global Growth?

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Includes: CHN, CN, CXSE, EPI, FCA, FXI, FXP, GCH, GXC, IIF, INDA, INDL, INDY, INP, INXX, JFC, KGRN, MCHI, PGJ, PIN, TDF, XPP, YANG, YAO, YINN, YXI
by: Helmut Reisen

The doomsayers will have to wait further for their collapse scenarios on China finally materialize. World Bank has just lifted its 2017 forecast for economic growth in China amid rising household incomes and a recovery in global trade[1].

China's and India's high growth has boosted global growth in recent years (Figure 1). From 2011 to 2015, China's relative contribution to global growth was on a par with advanced countries, despite its per capita GDP growth falling from a top rate of 13.6 % in 2007 to 6.1 % in 2016. India's contribution to global growth has also risen since the early 2000s, on the back of a per capita income growth rate oscillating between 8.8% in 2010 and 5.9% in 2016. However, China has contributed almost 30% to global growth in recent years, approximately 20 percentage points more than India. As India is still considerably poorer than China, it cannot yet offset the impact of China's slowdown on global growth and trade.

Figure 1: Contribution to global growth, 1991-2015, by areas (%)

Source: AEO 2016

Meanwhile, India has taken the lead over China in terms of GDP growth (but not per capita), with favorable demographics that encourage domestic savings and investment. In the future decades, Shifting Wealth may well benefit from a twin-turbo, China and India. Twin-turbo refers to the turbocharger configuration in which two identical turbochargers function simultaneously, splitting the turbocharging duties equally. Each turbocharger is driven by half of the engine's spent exhaust energy. A twin-turbocharger relying on China and India would be good news for convergence and for the world economy, counteracting the backlash emanating from populism and protectionism in the US and Europe.

Ever since the 1990s, there has been much talk about China's growth slowing down. But China's slowdown has been overhyped in Western media recently, while India has been celebrated as the new top-growth country. In per capita terms, however, China still leads India. China's growth has been coming down from unsustainable levels, while India's growth has been rising, erratically so due to her exposure to weather conditions. In recent years, growth in both Asian giants has comfortably settled above 5 percent per annum.

Figure 2: GDP real per capita growth (annual %), 1990 - 2016

Source

The June 2017 issue of the World Bank's Global Economic Prospects predicts real GDP growth at 6.3 percent for both 2018 and 2019; India's growth is forecast to reach 7.5 and 7.7 percent, respectively, in the two forthcoming years. Current annual population growth is 0.5 percent in China and 1.2 percent in India. So in real terms, per capita income growth is forecast to be superior in India than in China, albeit just by roughly half a percentage point.

Table 1: Percent of real global GDP Growth, forecast 2017 - 2019

China 35.2
USA 17.9
India 8.6
EU 7.9
Indonesia 2.5
Brazil 1.2
Russia 1.0

Source

Even so, Table 1 suggests that India is still far from contributing to global GDP growth on equal terms with China. Mind you, India is forecast to contribute 8.6% to global growth (based on the cited World Bank numbers), and that exceeds the EU contribution. Meanwhile, China will support more than a third of world economic growth during the end of the current decade. For the moment, the world economy doesn't enjoy a twin-turbo China-India quite yet. India is still too poor to meaningfully contribute: its GDP/capita relative to the USA stood at 11.6 percent in 2016. China's per capita income stood at 26.7 percent of US mean per capita income.

Figure 3: Trade (% of GDP)

Source

Another concern is that trade shares (% of GDP) have been dropping in India from 56 percent in 2012 to below 40 percent in 2016. India's weak export performance reflects her dependence on commodity exports and a poorly diversified export basket[2].

To be sure, China's trade shares have been dropping even more but this was a welcome outcome of rebalancing the country toward more consumption. In any case, the drop in trade shares observed in both Asian (Figure 3) giants translates domestic GDP growth mechanically into lower contribution to global growth. The twin-turbo support to the world economy in turn relies on an open trade system. With the US retreat from multilateralism under Trump, the twin-turbo engine is likely to stutter for a while.

[1] World Bank lifts China's 2017 growth outlook, Financial Times, 19th December 2017.

[2] Understanding India's export collapse, The Hindu Business Line, 21st November 2016.