An Asian century?
The following article is based on an interview with Lord Patten, the keynote speaker at an RBS Insight Dinner on 22 September 2011. The views expressed are his own. If you would like to discuss further the points raised, or find out about our banking and markets capabilities in China and India, please contact your local RBS office.*
"When I first went to China in 1979, it exported in a year what it now exports in a day"Lord Patten
The rapid economic growth of China and India in recent years has been viewed as a game of catch-up with the west. But Lord Patten of Barnes, the keynote speaker at an RBS Insight Dinner in September, believes that the rise of these two economies should be seen in its proper historical context.
This is not a case of playing catch-up, says Lord Patten, who, as the last governor of Hong Kong and the co-chair of the UK-India Round Table, speaks with singular authority on these issues. Rather, the world economy is finally reflecting the true strength of China and India, and we are seeing the return of a historic trend in which the biggest economies are the largest countries.
China has been the largest economy in the world for 18 of the past 20 centuries. India, too, has historically been an important pillar of the world economy. At the beginning of the 19th century, China and India represented 50% of global GDP.
“When I first went to China in 1979, it exported in a year what it now exports in a day,” says Lord Patten. “So the really interesting story is why China and India fell so steeply, rather than why they’re so resilient and important today.”
China’s share of global GDP in 1949 was 5% and it remained at this level until Deng Xiaoping began slowly to open the economy in 1978. Post-colonial India laboured, meanwhile, under a socialist command economy that only saw significant reform in the 1990s.
This narrative of underachievement has now come to an end. “At some point – at a date that people bring forward every year – China will be the largest economy in the world,” predicts Lord Patten. “By the middle of the century, the country with the largest population in the world will be India and the second will be China. This will have a huge impact on how the rest of the world lives between now and then.”
China has trebled its GDP per capita every eight or nine years since 1980. This reflects its extraordinary performance as an exporting manufacturing power, helped by the politicisation of credit, cheaper energy and cheap land.
“China has taken advantage of a huge and cheap pool of labour, which, combined with a mercantilist exchange rate, has enabled it to become the biggest exporter in the world,” Lord Patten says.
Yet Chinese consumption remains low as a proportion of GDP, as does domestic investment. If China is to make its growth sustainable, it must change its model from investment in low-cost manufacturing to investment in the domestic economy and personal consumption. This will mean offering more social entitlement programmes and investing more in education and health.
Sustainable growth also requires political reform, an area in which the Chinese leadership has had to tread carefully. “The Chinese often claim that they can do things to the economy without having an effect on politics,” says Lord Patten. “I rather doubt that myself and so, clearly, do some Chinese leaders.”
We should be realistic about the challenges that both countries face. “India has appalling infrastructure problems and there’s growing distrust of representative democracy,” he adds. “Corruption, as we saw during the Commonwealth Games in Delhi last year, remains a corrosive influence.”
He says that we should be wary of making casual comparisons between the two countries. India has, for instance, been more effective than China in establishing global brands. “The largest manufacturing employer in the UK is Tata and there are other great Indian companies, such as Infosys and Reliance,” he points out. “India hasn’t just done well in business services
and IT, it’s also succeeded in pharmaceuticals and motor manufacturing.
“India consists of a host of different economies, some of which are more successful than others,” he continues. “Gujarat, for example, has only a 5% share of the country’s population, yet it is responsible for 16% of GDP and 22% of exports.”
India’s mature political development remains a source of strength. “Its representative democracy and commitment to the rule of law have held together all its complex religious, ethnic and linguistic groups,” says Lord Patten. “India is an astonishing democracy – perhaps the most extraordinary in the world – but I don’t think it’ll be a superpower.”
In fact, neither China nor India has forged a global political voice concomitant with its growing economic prowess. “Indians still tend to see themselves through the prism of the non-aligned movement and are reluctant to rise to the challenge of their economic clout,” he notes. “The Chinese are prepared to play a larger regional role, partly to flex their muscles over issues such as oil and gas exploration in the Spratly Islands. But they’re not prepared to shoulder burdens that the US has carried in its capacity as the main global marketplace or the global chief of police.”
China still has an uneasy relationship with the west, as we have seen in the US’s concerns about the trade imbalance and the undervalued Chinese currency. “Most of China’s resources have gone into piling up a spectacular war chest of foreign exchange reserves, now worth about $2.5trn,” he says. “But it seems odd that poor Chinese households should be subsidising rich western households. The purchase of low-yielding foreign assets, which represent about 11.5% of GDP, doesn’t seem to be sustainable.”
As yet, Beijing has resisted American pressure over the renminbi (RMB). China is unlikely to meet Washington’s demands for its currency to appreciate, making the RMB an unlikely alternative reserve currency to the dollar. “China won’t respond to US concerns unless it’s convinced that this is in its domestic interest,” says Lord Patten.
India, meanwhile, is struggling to open up its economies to outside investment. “After the foreign exchange crisis of the early 1990s, India dismantled some of the protections for its industries and loosened the cat’s cradle of controls in the economy,” he says. “But it has been slow in continuing that relaxation in areas such as banking, insurance and retail, and there’s a lot of resistance to going any further.”
Firms that are looking for opportunities in China and India should be discerning in their investment decisions, warns Lord Patten.
“In India, I’d advise firms to focus on areas with the most commercially friendly state governments: those that have the greatest commitment to infrastructure investment, labour market deregulation and education,” he says. “In China, people are less inclined today. Any decision should be based on prudence rather than romance.”
Next year will see a change in China’s political guard. Xi Jinping is expected to take over the presidency from Hu Jintao, but comparatively little is known about the likely new leader’s agenda. There is an ongoing debate within China between the party hardliners and some of the modernisers.
“The hardliners’ argument is that if the party continues to allow the privatisation of state and enterprises, along with more foreign direct investment, it will sooner or later lose control over the state,” explains Lord Patten. “The modernisers say that unless they continue to stand back from the state and enterprises, and encourage the private sector, the economy won’t grow quite so fast and won’t create so many jobs, which would result in the party losing control. I think the Chinese dilemma is that both those propositions are correct.”
In light of these challenges, he questions the claim that the 21st century belongs to China. “It’s certainly the case that America and Europe won’t dominate the global agenda in the next few years in the way they have in the past century,” he says. “But I don’t think that we’re going to live in a Chinese century. It may be one in which the Chinese and Indians, like the Japanese, refuse to define modernity in entirely western terms, but I don’t believe that we’ve seen the end of western influence.”
Written by James Gavin, Wardour on behalf of RBS
*The statements and opinions expressed in this article are solely the views of Lord Patten, as per his personal appearance on 22 September 2011, and do not necessarily represent the views of The Royal Bank of Scotlandplc or any affiliated entity (‘RBS’), its employees or any of its clients. This document has been prepared for information purposes only. RBS does not, and should not be deemed to, endorse or sponsor the views of Lord Patten by virtue of dissemination of this article. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation of any kind. The information contained herein has not been independently verified by RBS and no representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information or statements contained herein. RBS and each of its respective affiliates does not accept any responsibility and disclaims all liability for any loss or damage arising in any way from any use made of or reliance placed on, the information contained herein.
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