The Dragon and the Elephant Still

07/15/2010 12:01 am EST


Robyn Meredith

Senior Editor, Forbes

Robyn Meredith, Hong Kong correspondent for Forbes and author of the best-selling The Elephant and the Dragon, says Chinese and Indian growth remains on the fast track.

Q. Your great book on China and India came out three years ago—what's changed since?

A. The statistics are clearly out of date, but otherwise I'm lucky to say that everything in it is still true. I wrote the book to give people an understanding of what's going on in India and China and why it matters to them, and that it still does, fortunately.

In a way, China has grown more important than India at this stage in the game. India's economy, having been traditionally closed off from the West, has benefited from that by not falling as far in the economic crisis. The recent growth figure was 8.6%. So now, after slowing down a bit during the crisis, India is back to China-style growth, which is huge.

But China, meanwhile, with a huge amount of government spending, powered into growth in the 10% range. Big companies are counting on growth from Asia to keep profits flowing during a time when they're expecting slower growth in the US and Europe. For companies, China, India, and other emerging markets are going to be the saviors of an otherwise dismal corporate outlook.

Q. But is that enough? Skeptics say the Asian consumer markets are smaller than developed-country ones, which have clearly slowed. And then there's the whole "China's a bubble; they're building white elephants" school of thought.

A. I don't believe in the bubble myth for China. China now is more like America in the 1950s and 1960s, which was a time of great spending on domestic projects but also great innovation and real improvement in people's standards of living as well as the resources of the country. So, for instance, in the 1950s, America built out the highway system. China has just done that, is still putting the finishing touches on it. China is building not just modern railroads but is leapfrogging the US in building fast trains.

Those kinds of massive infrastructure projects that we in America don't do any more because we already have them, that's what China is doing now. And while a couple of those railroad spurs may be railroads to nowhere, the majority of them are not. They're building a national system. I am concerned about a housing bubble in China. As with every bubble, it's easy to say when there's a bubble but hard to say when it's going to pop.

Q. What would be the consequences of a Chinese property bust?

A. It would hurt a small but important percentage of China's population—the roughly 200-300 million middle-class Chinese would spend less money.

Q. But it wouldn't bring down the banking system?

A. No, because China's banks are partly state-owned still. The state would simply inject money into the banks. The big four banks in particular have had just massive capital injections over the years in a couple of tranches to shore them up. That's been the pattern through several downturns and is likely to be again.

A lot of the loans the banks made under economic stimulus are due three years later and a lot of them will probably go bad. But most observers here in Asia aren't worried about it, because Beijing is likely to shore up the banks again. It's not a "normal" economy—that's what investors need to understand. China has state champions, and it will continue to.

Q. There are those who argue that China's economy is artificially stimulated to boost exports at almost any cost.

A. Yeah, but that's been China's policy for a long time, so why would it stop? The consequence of China's undervalued currency is that its workers are underpaid and they don't buy as much as they would otherwise. Another consequence is that American consumers get a good deal, because China wants to employ more people at lower wages rather than fewer people at more livable wages. I don't see that policy changing any time soon.

Q. It doesn't sound like you expect yuan appreciation to bring meaningful change.

A. Yeah, you're right. I expect appreciation on the order of 5%, which would still leave the currency quite undervalued.

Q. Should people invest in India, China, neither, or both?

A. I think both. They are different, but India, China, and the other emerging markets are the only place where there's going to be strong growth for probably the next five years, whereas I think there's a danger of a double-dip recession in Europe as well as the United States.

It would be great for China and India if American and European consumers got back to their free-spending ways; that's clearly not going to happen any time soon. And yet you see an up tick in exports across Asia. I'm not a believer in the decoupling theory, but I do think that China's increase in consumer spending [offset] the decrease in American spending. The numbers have gotten so big for domestic spending in China that they're starting to really matter and affect things in the West as well.

Q. Do you think the Chinese market's big decline from last year's high is a sign of more trouble ahead?

A. I'm not the world's greatest expert in individual stocks or short-term market movements, but I can tell you that China is extremely volatile and very momentum-based. The Chinese markets are so immature that they're literally driven by astrological projections and lucky numbers some days. That said, the economy in China is going to be marching on. So if you believe that, you want to pick what you think is a bottom and buy in. What goes down also goes up. 

Q. Thank you.

—Igor Greenwald

Learn more about The Elephant and the Dragon here…

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