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Building for Success
Is China's infrastructure overbuilt and undermaintained? Yes. We saw it this past July when faulty software led to a horrific collision of a new bullet train around the prosperous town of Wenzhou, near Shanghai. But as Andy Rothman, chief China economist for CLSA Securities, argues, the past decade was precisely when China should have developed its infrastructure: "The idea that all these companies, whether domestic or foreign, would have built all these factories in places like Chengdu or Dalian or Chongqing without the government's role in creating the backdrop is just crazy." And now, not surprisingly, the government is slowly but surely ratcheting down the amount it spends on infrastructure, removing some inflationary pressure from the economy and making it unlikely that there is any sort of hard landing in China's future.
Those who contend that India will eventually surpass China as an economic power always make the same point: the relative inferiority of Indian governance and infrastructure only highlights the vibrancy of the country's private sector. After all, they say, look at how rapidly India is growing despite all its governance issues. You'll get no argument here. The growth of India's private sector over the past two decades, the fact that the country now is home to genuine, world-beating, multinational companies, are extraordinary. In making the case for China, I'm not going to run down what's happened in India.
What I will say is that the emphasis everyone places on the strong hand of the state over the past decade in China obscures a central fact: the private sector is vibrant too. For 17 months now, private-sector investment growth has been running significantly faster than that of the public sector. That's doubly significant because private companies in China, and in particular SMEs, barely have access to capital from state banks. For the most part, "they are investing their own money," says Rothman. The only rational conclusion to be drawn, he says, is that "the state of the private sector here is very strong."
It's going to get stronger. China is in the process, slowly but surely, of liberalizing its capital markets. The renminbi will eventually be fully convertible. Sectors like e-commerce and biotechnology, already red hot, will get more access to domestic capital. Less glamorous but no less important industries are also expanding rapidly, and taking advantage of China's well-educated workforce. In 2008, General Electric moved its research center for producing clean, affordable energy out of coal to the nation that consumes the most coal in the world. Guess where?
The ultimate trump card of the India-whips-China lobby is demographics. In 20 years China becomes an aging society, with more retirees becoming a drain on the nation's finances. India in the same time frame will have a huge contingent of young, able-bodied workers. In GDP terms, a growing, working-age population means a bigger economy. And that, as far as the demographics-is-destiny crowd goes, is that: India wins.
Please. First, India needs to educate those workers of the future (the way China already does). And second, How much do you want to bet that a significant chunk of those new Indian workers wind up in relatively unskilled factory jobs — of the sort that propelled China's growth for the past two decades but won't 20 years hence? By then, China will have solidified itself as the world's biggest and most technologically robust manufacturing power. It will also, at the same time, be the biggest market for just about any product, industrial or other, you can name. India may, over the medium term, outgrow China in a strict GDP sense, thanks to that demographic bulge. But it will be growing to get to where China is now — a relatively low-wage economy with a first-world infrastructure. By the time India gets there — if it does — China will have moved on. It will be the most powerful economy on the planet.