The India-China Equation - A Reordering Of The Fates

China’s highly speculative and opaque stock market cannot sustain the illusion of continued growth anymore.

China, the biggest power in Asia, is clearly falling apart. The country that aspires to dominate the narrative of today’s world, the country that dwarfs India with its riches and might, is in sudden and steep decline. Its rate of growth is halved, making it difficult for its storied superstructure to thrive and for its flag to keep fluttering on high.

Today experts are saying that the threat of economic turmoil from Greece and other highly indebted western economies such as Spain, Portugal, Italy, Ireland is dwarfed by the implosions being experienced in China.

In three weeks just past, China has lost 30 per cent of the value of its stocks represented by over $3 trillion; and 50 per cent of its listed stocks have suspended trade, even after a massive government bailout was put in place. Bloomberg says Chinese stocks are being sold off wherever in the world they are listed. Chinese millionaires are moving themselves and their money out of China.

With growth rates of just about 6 per cent a year, China is down to numbers it has not seen for 30 or more years. This is not enough to keep things going, and is half of what it took to make China a $10-12 trillion economy.

China’s highly speculative and opaque stock market cannot sustain the illusion of continued growth anymore. The rumours of a highly stressed banking system, idle infrastructure, empty housing estates, inadequate domestic demand, state-owned companies with red ink writ large on their balance sheets, an artificially valued currency, has been doing the rounds for quite some time now.

Still, at its present size, China’s economy is second only to that of the United States and its rapid shrinkage will have a profound impact on the global economy.

Reserve Bank of India (RBI) governor, Raghuram Rajan, recently predicted a possible global great depression unprecedented in its severity. He based it on the trend of competitive ‘quantitative easing’ (QE) in the West, which, he said, was a false growth chase, fuelled by money alone. It is unclear whether Rajan included China in his calculations.

But now other analysts are drawing parallels with the Lehman collapse. Lehman was a bank that couldn’t fail, but did. What happens when the world’s second biggest economy begins to fail? After all, once again it is a debt trap that is responsible.

China’s collapse cannot be total for now, given its immense reserves, but even a great stumble will set off a tsunami alright. Take the case of the petroleum market, already reeling under production gluts and sharply declining prices. China is one of the biggest importers and consumers of oil. What will happen to this market when China further moderates demand? Will a barrel of crude then sell for $ 25? What will that do to the petroleum exporting countries? What will happen to the global currency markets? And to metals and commodities? India, of course, will benefit from lower prices all around, but just how badly will it affect other countries?

The Chinese meltdown will have significant geo-political consequences for the world and specifically for India.

The stock market collapse in China is causing panic selling in its bourses and may well send some investment dollars into Indian stock markets, but that is actually the small expected gain. The big gain is this: China will have to deal with India on a more equitable basis.

That is why Prime Minister Narendra Modi can make repeated polite demands of Chinese Xi Jinping, on the border issue, on its support for Lakhvi and on other matters, and receive a patient hearing. That is why Xi came to visit in the first place, and why Modi returned the call. There are protestations of a new high in the Indo-Chinese relationship to boot, on the side lines of the BRICS meet.

This circumstance of China weakening perceptibly has come about even as Modi has been struggling with Chinese incursions on the borders, a huge trade imbalance and pressure via a perpetually sabre-rattling Pakistan.

Europe is truly crumbling, albeit backstopped by a tremendous backing from the United States. America, on its part, is going to be recovering from the crash of 2008 for quite some time yet, and there goes its plan to raise interest rates based on its nascent revival. But having to nanny Europe, for decades to come, with a meagre larder at home, is a daunting prospect for it.

Given the changing circumstances, the United States has been forced to be more willing than ever before in its short history to share power with others. It is making up with Iran, for example, even in the teeth of Saudi and Israeli objections.

It will, and is, treating India with tender care and respect, mostly shorn of past prejudices, even though India is just a $2 trillion emerging economy. After all, India is tagged on with the fastest growth rate in the world, very significant now that China is faltering.

India, eager to join the developed world, has a new-found leverage via recent geopolitical trends, and it will, therefore, have recourse to funds and technology like never before. Its ambition to grow at double digits will not only fructify, but also sustain for decades to come, fuelled by pent-up demand, particularly for infrastructure, and massive domestic consumption needs.

Indian wages too are attractive, compared to those of China and other places that are at the watershed of their development curves. India has a great deal of young and cheap trainable labour along with a highly-educated workforce at the top levels, a majority of whom speak good English. It is seen to be capable of making sophisticated goods and components without too much supervision. It also has a highly sophisticated capacity to ramp up digitally and in IT software terms.

China’s formidable manufacturing, exporting and infrastructure building abilities will increasingly go a-begging, except perhaps in India, a country capable of paying its bills.

But India is just one country, growing from a low base, and, the way things stand, it is only a matter of time before the overhanging avalanche comes down the slope, burying China’s dreams of world domination, at least for now.

If there is to be an Asian century in the 21st , going forward, who will it properly belong to? At present the jury is out, but by 2019, it may have come to a decision.

The calculus elsewhere too is changing inexorably. Putin’s Russia, sensing the decline and fall of the once impregnable West, is asking for respect, with a steely view to securing it in reality.

The time for dictation and one-sided perceptions of the political situation has almost passed. The fates are reordering the world, and India stands to benefit.