8 March 2012

Macro Asian Economics

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Global Research

Chart of the Week

China and India, not so different

Last week was a bit of a downer for India. Data showed that growth slumped last quarter by more than expected. Its easy to throw blame around: reforms have stalled, inflation remains stubbornly high, roads are inadequately paved. But a return to the Hindu rate of growth this is not. The country has made significant strides in recent years. Sure, as our Chief India Economist Leif Eskesen notes, dreams of double-digit growth are, well, still just that. That is no reason, however, to proclaim the end of Indias impressive run. The current slowdown, after all, owes as much to monetary tightening as to structural bottlenecks. Both can, and will, eventually ease. There is also no reason to think that India could not ultimately match China in economic vitality. The development trajectory of the former isnt so different from the latter India only started a little later down the road to prosperity.

In an autocracy, one person has his way, in an aristocracy, a few people have their way, in a democracy, no one has his way. Celia Green China, no doubt, is Asias economic star. No country before has developed by such leaps and bounds. It is easy, therefore, to dismiss other economies advances as inadequate. That would be wrong. For two reasons. First, even if not growing quite at Chinas speed, other countries are making impressive gains as well. Second, China is currently at its sweet spot. And it took many years and arduous reforms to get there. Only think of the 1980s and 1990s: roads, reforms, and prices were just as much a headache in China as they are in India today. Take
Chart 1: So far, India is following the same trajectory as China: Investment as a share of GDP (%)
50 45 40 35 30 25 20 T0 T2 T4 T6 T8 T10 T12 T14 T16 T18 T20 T22 T24 T26 T28 T30 T32

Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2822 4556 fredericneumann@hsbc.com.hk Tushar Arora Economics Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

India (from 1991)

Source: CEIC, HSBC

China (from 1978)

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Chart 1. Here we show investment as a share of GDP for India and China. The former started its reforms in 1991, following a currency crisis, which sparked a shift in economic policy and kicked off two decades of rapid growth. Reforms in China date back to about 1978, when, under the leadership of Deng Xiaoping, the country began to open up and experiment with liberalisation in Special Economic Zones. China, in short, had a head start over India of about 13 years. Whats remarkably about this chart is that investment is following a roughly similar trajectory in both countries. So far, India hasnt underperformed its neighbour.
Chart: 2: Income evolved along similar lines since the beginning of reforms (per capita GDP, PPP terms, 2005 constant prices)

7000 6000 5000 4000 3000 2000 1000 0 T0 T2 T4 T6 T8 T10 T12 T14 T16 T18 T20 T22 T24 T26 T28 T30

India (from 1991)

Source: PWT, CEIC, HSBC

China (from 1978)

The story is the same for income. Our second chart shows per capita GDP from the start of reforms in both economies. At the outset, Indians enjoyed income roughly at twice the level of the Chinese. Over the subsequent decades, per capita GDP evolved along the same lines in both countries, with Chinas per capita GDP considerably higher today since it is further along the reform process. Charts 3 and 4 show the size of Indias and Chinas economies and their level of exports for the first 20 years after the start of reforms. Again, the story is not all that different. Both countries followed a similar path, with their overall economic expansion being virtually identical after two decades. Whats also striking is that India doesnt really underperform China in exports. While the former is often regarded as a more internally focused economy than the latter, and thus perceived to have less growth potential (export-oriented growth, under
Chart 3: Nominal GDP (USD, indexed, reform start = 100) Chart 4: Level of exports (USD, indexed, reform start = 100)

700 600 500 400 300 200 100 0 T0 T2 T4 T6 T8 T10 T12 T14 T16 T18 China (1978) India (1991)
Source: CIEC, HSBC

2000 1500 1000 500 0 T0 T2 T4 T6 T8 T10 T12 T14 T16 T18 T20 India (1991)
Source: CIEC, HSBC

China (1978)

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Chart 5: Indias economy is today as open as Chinas economy (trade as a share of GDP, %)

70 60 50 40 30 20 10 China India 1996-2000

Source: CEIC, HSBC; NB: Asia ex Japan is simple average

Indonesia 2001-2005 2006-2010 2011

Japan

As ia ex Japan

current economic orthodoxy, is regarded as a superior recipe for development), data suggest otherwise. Indias exports expanded at roughly the same pace in the post-reform period as Chinas exports. In fact, it is also difficult to argue that Chinas economy is vastly more open than Indias economy (as measured by exports and imports as a share of GDP). India is currently as open as China was in the late 1990s, and indeed as open as China is today after the country saw the share of trade in its GDP decline again in recent years (Chart 5). None of this is to say that India does not have plenty of homework to do if it wants to continue to match Chinas development. A quick look at our last two charts shows how steep the climb would be in the coming years if India wants to keep up. In fact, Leif Eskesen published a highly thoughtful report on Indias growth prospects over the coming years that is worth another close look (see Double-digit dreams: Will they come true?, 18 April 2011). In essence: to hit double-digit growth, the country will need to re-double its reform effort. Still, its one thing to worry about India hitting growth above ten percent, and quite another expecting it to slide back into its torpor of the 1980s. Time to give India a little break.

Chart 6: Nominal GDP (USD, indexed, reform start = 100)

Chart 7: Level of exports (USD, indexed, reform start = 100)

4000 3000 2000 1000 0 T0 T3 T6 T9 T12 T15 T18 T21 T24 T27 T30 India (1991)
Source: CEIC, HSBC

20000 15000 10000 5000 0 T0 T4 T8 T12 T16 T20 T24 T28 T32 China (1978)

China (1978)
Source: CEIC, HSBC

India (1991)

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HSBC Main forecasts

___________ Real GDP (%) ____________ 2010 2011 2012f Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Asia Asia. Ex CN Asia. Ex JP Asia. Ex. JP & CN
Source: HSBC, CEIC

___________CPI (ave, % yr ____________ 2010 2011 2012f 2.8 2.3 3.3 2.3 10.4 5.1 -0.7 2.9 1.7 3.8 2.8 6.2 1.0 3.3 9.2 2.6 2.3 4.3 5.5 3.6 4.0 5.4 5.3 8.9 5.4 -0.3 4.0 3.2 4.8 5.2 6.7 1.4 3.9 18.7 3.7 2.7 5.6 5.9 3.1 2.7 2.9 5.3 8.1 5.7 -0.4 3.4 2.6 3.8 2.6 6.0 1.2 3.7 12.1 2.5 2.3 4.0 5.2

_________ FX vs. USD (end) __________ 2010 2011 2012f 1.03 0.73 6.62 7.77 44.81 8,991 83 1,139 3.13 44.0 1.29 111.1 30.4 30.0 19,498 n.a. n.a. n.a. n.a. 1.02 0.77 6.30 7.77 53.06 9,069 78 1,153 3.17 43.8 1.30 114.0 30.3 31.6 21,034 n.a. n.a. n.a. n.a. 0.95 0.73 6.12 7.80 47.50 8,500 74 1,070 2.88 41.0 1.19 125.0 28.0 28.8 21,500 n.a. n.a. n.a. n.a.

2.6 1.7 10.4 7.0 8.5 6.1 4.4 6.2 7.2 7.6 14.5 8.0 10.7 7.8 6.8 7.6 6.1 9.3 7.9

2.0 2.0 9.2 5.0 7.1 6.5 -0.9 3.6 5.1 3.7 4.9 8.1 4.0 0.1 5.8 4.5 2.1 7.2 5.3

3.4 2.8 8.6 3.1 7.5 6.1 1.0 2.0 3.7 3.6 2.0 6.5 1.8 4.0 5.7 4.9 2.8 6.8 4.7

Chart 1: Real GDP (% y-o-y, nominal USD weights)

Chart 2: CPI (% y-o-y, simple averages)

12 8 4 0 -4 -8 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Asia Asia x J Asia x C Asia x C& J

Chart 3: Exports (% y-o-y, nominal USD weights)

15 10 5 0 00 01 02 03 04 05 06 07 08 09 10 11 Asia x J ASEAN NIEs

Chart 4: Asia x Japan (simple averages)

40 20 0 -20 -40 00 01 02 03 04 05 06 07 08 09 10 11 Asia x J Asia x C Asia x C&J

Source: HSBC, CEIC

20 15 10 5 0

10 8 6 4 00 01 02 03 04 05 06 07 08 09 10 11 M2 supply (% y r, LHS) Policy rate (% RHS)

Source: HSBC, CEIC

HSBC Policy rate forecasts (% end)

4Q-11 Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam
Source: HSBC, CEIC

HSBC Asia equity market recommendations

3Q-12f 4.00 2.75 6.31 0.50 8.00 5.50 0.05 3.25 2.50 4.00 0.40 9.50 1.750 3.00 10.00 4Q-12f 4.00 3.00 6.31 0.50 8.00 5.50 0.05 3.50 2.50 4.00 0.40 9.50 1.875 3.00 9.00 1Q-13f 4.25 3.25 6.31 0.50 8.00 5.75 0.05 3.50 2.75 4.50 0.40 9.50 2.000 3.25 9.00 Market China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC recommendation Over Neutral Neutral Neutral Under Neutral Under Over Over Under Previously Neutral Over Neutral Neutral Under Neutral Neutral Over Over Under Rel 3M Performance 1.9% 1.5% -7.2% -1.0% -0.3% 2.8% 5.9% -1.6% 0.0% 5.1% End-2012 target 64 21,500 16,500 4,100 1700 1,550 4,400 3,000 7700 1,000

1Q-12f 4.25 2.50 6.56 0.50 8.50 5.75 0.05 3.25 3.00 4.00 0.40 9.00 1.750 3.00 13.00

2Q-12f 4.00 2.50 6.56 0.50 8.25 5.50 0.05 3.25 2.75 4.00 0.40 9.25 1.750 3.00 11.00

4.25 2.50 6.56 0.50 8.50 6.00 0.05 3.25 3.00 4.50 0.39 8.50 1.875 3.25 14.00

Note: Relative performance (w.r.t. MSCI Asia Pacific index).Current index and rel 3M perf as of 30 January 2011. Source: Bloomberg, HSBC Equity Strategy Research

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Frederic Neumann

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