China’s economy expanded 11.9% in the second quarter of the
calendar year, 2007. This growth rate was higher than the rate of 11.1%
achieved in the first quarter of 2007. Inspite of the efforts to cool down the
economy by the People’s Bank of China, the Central Bank of the country, the
growth rate has refused to tame down. The current growth rate is the strongest
in the last 12 years.
The data released for the second quarter of 2007 indicates
that the G.D.P. of the first half of the year has surged to 1.41 trillion US
Dollars, up 11.5% from a year earlier. During the period, the consumer price
index rose by 3.2%; but the food cost rose by 7.6%. The rising food prices
have become a cause of concern to the Central Bank as it can make lower income
group consumers shift the focus to food thereby reducing domestic demand for
manufactured goods.
The very next day of declaration of the quarterly numbers,
People’s Bank of China increased the interest rates by 0.27%. These rates are
increased for both lending as well as for deposits. The benchmark lending rate
is up to 6.84% from 6.57%. The deposit rate is raised to 3.33% from 3.06%.
This is done in an effort to cool the economy and asset growth, which is a
cause of worry to the Central Bank.
The high economic growth is causing a fear of asset bubble
in China. The stock market has soured by 130% during 2006. It has further
grown by 49% since beginning of 2007 till 21st July 2007. The property prices
have not been left behind. In the prime areas, they have doubled in the last
couple of years. Still there is no sign of let up. The huge foreign exchange
reserves is adding headache to the woes of the Central Bank in controlling the
economic growth as it is adding liquidity in the Chinese economy. The local
currency has gradually appreciated against the US Dollar, though the rise is
not based on pure economic mechanism. So the balancing act of the Central Bank
is becoming difficult. In spite of the efforts by the Central Bank, there are
no indication of cooling down of economy and the risk of inflation and even
asset bubble is looming larger than ever before. The current situation in
China is an economic phenomenon for experts to ponder on. It may become a case
study of the risks of high growth. In this country following communist
ideology, today, the rich are becoming super rich and poor are finding it
difficult to keep pace with them.
The Central Bank of China is sitting on huge foreign
exchange reserves. The major part of the resources is in US Dollar denominated
assets. The reserves can be deployed for purchase of assets abroad or
investment in bonds/debts. For strategic reasons, Western world is not
comfortable with China acquire their prime companies. This has made the job of
Chinese government more difficult. Bigger political drama will emerge in the
years to come. It will be interesting to see how China copes up with its
liquidity and foreign exchange reserves.
Since last few years, to control the bulging population,
China has adopted one child per couple policy. The policy is more strictly
implemented in urban and developed areas and the population in remote rural
areas is growing still. There are certain exceptions to the rule of one child
such as when both the parents in a couple are single child to their respective
parents; such a couple can have two children. Even in case of certain medical
problems of the first child, a couple can have a second child. If a couple has
a second child against the policy, they are liable for fine and subsidy of
education cost which is granted to the children of common citizens is not be
available to the child of the couple. The cost of higher education in China is
very high. The second child can really upset the family budget.
The policy per se looks very effective to control
the population of the country having the highest population in the world.
However, it has some long-term and serious economic effects. With advancement
of medical science, the life expectancy of human beings has gone up
substantially. However, their economically productive age has not gone up
proportionately. If the young population in a country does not balance the
aging population in number, there can be substantial financial burden on the
young population. The social security and pension payments to the aging
population come out of the current income earned and taxes paid by the young
working population.
In the next two decades, if the population growth becomes
negative in China, which is very much expected to happen, the aging population
can substantially pull down the economic growth rate. Shrinking number of
young population does not auger well for medium term economic prospect of a
country. It can drag down the economic growth rate and per capita income. In
most of the developed countries, the growth rate of population is very low and
even negative in some cases. This phenomenon arises out of economic
compulsions as well as due to demographic habits and behaviour of a community.
Economic independence of female population and work stress can cause negative
effect on the population growth. Today many a developed countries are facing
the situation.
To control growing of population, China has resorted to the
drastic measure, which can give quick results. However, these fast results can
create a distinct problem for the next generation and the economy, which they
will inherit. Time alone can tell how effectively China can manage this
transition, without sacrificing its economic growth rate to a substantial
extent.
China has excelled in low cost manufacturing. India is
growing rapidly in low cost, good quality services. It is growing aggressively
in software, call centre, BPO and KPO services. China wants to learn English
language for getting aggressively in services. India wants to expand its
manufacturing base and still keep its cost low. Currently, both the countries
are growing fast but they have started facing talent crunch and cost
pressures. For the international investors, both the countries offer great
opportunities. Investors need to be selective as the prime assets are not
necessarily cheap in both the countries.
Though today China is growing faster than India and it has
managed to create robust infrastructure, a time may come in the next decade
that China will start slowing down. Indian growth story is more sustainable as
it is based on services, which are generated out of qualified manpower within
the country. Though there may not be dramatic changes in India, the Indian
story may last longer during the next few decades. Indian population is likely
to surpass that of China in the next thirty years and that can caused many
challenges. This growth may stop only after 2050 unless drastic measures are
taken by the government, which is very unlikely. Hopefully the fertile land of
India will produce enough food for its growing population and the golden years
of high economic growth will continue for good number of years to come. I
believe that India is the place to invest today and even tomorrow.
