INDIA, China

INDIA is going through a very strong urbanization path. It is expected to reach 65 percent urbanization rate by 2050-2055, which means 700 MLN more people in urban areas. China went through the same path between 1998-2025. Such enormous change will require large amount of basic materials, such demand will put upward pressure on commodities in the same way, how China was doing it in the past 25 years. It is a kind of luck for us, that Chinese urbanization rate is slowing down, since the commodity market could not handle 2 urbanization booms at the same time. We should be happy that demand for new housing in China will stay low in the next 10 years, since as China slows, India speeds up. Based on this forecast, we can calculate, that Chinese Fixed Asset Investments and real estate investments growth will be only 3 percent in the next 10 years as an average (calculating with a starting point of 2026), but Indian will stay between 7-11 percent. Number of active population in India is growing by 1,5 %/year until at least 2050, but in China it will fall by 0,5%/year. Just this 2 factors will result in a minimum 2,5 percentage points growth gap between the two countries. On top of this in China there is an about 50 million unsold housing inventory, which is roughly 20 M more than it should be. Unfinished and unsold homes will be 0,5 percent/year drag on Chinese growth until at least mid of 2026.

In India we have constant and continuous housing shortage, which will underpin their economic growth for many years to come. Under investments in Indian public infrastructure could add additional 0,5 percent to the projected growth differential between India and China in the following 15-25 years. All these add up to a potential 3,5 percentage points growth gap between India and China. These assumptions are based on further lack of policy action in China and vigorous reform policy in India, so it is rather pessimistic and by its nature favors India.

China has one substantial area where it has enormous advantage and that is the huge pile of underutilized household savings, which could be channeled to more productive area and could fuel a consumption boom in the next 15-20 years. Consumption in China is low, due to the ongoing adjustment in the real estate sector and partially due to the rapidly aging population, which is coupled with a relatively low pension age.

IP protection is still not sufficient, corruption is still high in both countries

The 12 percentage point savings gap between China and India is big and can help China to reduce its growth gap compared to India by an about 0,5 percentage points in the next 15 years. All these macroeconomic assumptions are based on proper decision m making in both countries and proper handling of the past problems. Although China is doing lots of things to reduce the corruption, but respect towards intellectual property rights are still not sufficient and " many authentic IP rights owners " did not get paid for their past work, due to very slow enforcement process and too low recovery rate. In case of India corruption is still extremely high and people close to the highest political echelon do not show any respect neither to IP rights, neither to small business owners. Rampant corruption and not sufficient enforcement activities coupled with meagre IP protection can reduce Indian growth potential by an up to 1 percentage points every year in the following 15 years.

Still not so strong IP protection coupled with the still prevalent corruption and relatively low recovery rate in China reduces their annual economic growth potential by a minimum 0,5 percentage points. All the above mentioned facts could result a maximum 3,5 percentage points, but minimum 2 percentage points growth gap between China and India. Considering the chances for potential adjustments in both countries in relation to the IP, ENFORCEMENT, RECOVERY related policies, we can assume, that annual economic growth in China can be as low as 3,5 percent and as high as 5,25 percent until 2045. In case of India we can have as low as 6 percent and as high as 8 percent economic growth per year. It could mean, that in best case Indian GDP growth could be 4,5 percentage point stronger than Chinese ones, which could - theoretically- justify the current stock market valuation gap between the two Asian countries.

Inflation: Structurally and cyclically lower in China

In relation to inflation we can assume, that Chinese inflation rate is minimum 2 percentage points less than the INDIAN one, just because of the age gap between the two countries. In addition to this, the saving surplus of China and glut of unsold real estate puts an additional damper on Chinese inflation. If China does not start to make a big macroeconomic adjustment in the following weeks, then there is a chance, that China could experience zero inflation in the next 15 years and a time when INDIA will experience constant upward pressure on inflation, due to their strong need for investments. In worst case I can imagine a 4 percentage points constant gap between the Chinese and Indian inflation. Due to slowly improving Indian, but slowly deteriorating Chinese competitiveness we can assume, that Indian trade deficit will start to shrink in tandem with a shrinking Chinese trade surplus. I still believe, that the two countries could underpin the global economic growth in a tremendous way, especially if both of them will fix their above mentioned problems. China should do much more and now, but India has many unsolved - structural/financial- issues as well. In best case the 2 countries together could provide more than 50 percent to the global economic growth in the next 20 years, but even in worst case will provide at least 30 percent.

The time for major Chinese economic reforms has arrived, if they want to sustain 5 percent economic growth in the next 15 years. If they do larger reforms in the following months, than economic growth from 2026 will pick up again and can be sustained around 5 percent, if they decide to wait, then China will experience continuously slowing economic growth in the following 10 years and its dream to surpass US economy by 2031 will be shattered even in case of a major US economic recession in 2025/26. I still did not give up on China, but lots of things (maybe only "one") must be done and now not later to get out of the current downward spiral. India is different, but the country still did not achieve its true potential. If both countries would do everything what they can, then their growth could be enough to mitigate any negative effect of an incoming US economic adjustments. It is time for Asia to wake up and show its real potential and to be a real engine of economic and social well being of the world.

Peter Heim

Budapest