The Tortoise and the Hare

I recently read an article by Mr Roubini (whose name always carries the editorial comment "who predicted the financial crisis) comparing India with China and what the Indian will have to do to catch up with China.

In the article Mr Roubini compares China to the hare, and India to the tortoise. Funny, we all know who won that race so why is he advocating a massive need for financial and human capital for India to run faster.

The Achilles Heel in both countries, if not all countries, is the spectre of social instability. In China the government has effected an almost total capture of household and business savings. Essentially all deposits go to state-run banks which then lend to state-linked firms at below-market rates. It's not really surprising that China has achieved an amazing growth rate:it has an almost unlimited supply of 0 percent loans, which it lends relatively consequence-free to companies that employ the very people from whom the loans come.

Sounds good, like a perpetual motion machine. Well if that's the case, then someone should explain to me why, according to China's own official statistics, that more than 600 million urban citizens live on an average of around $7 a day, and another 700 million rural peasants live on an average of $2 a day, and yet China has one of the highest number of millionaires, not to mention billionaires in the world.

Oh, and as an aside, the same statistics source cites a total population of 1.3 billion, so I guess the wealthy aren't included in the numbers?

Now, back to social instability. China is an export nation, and in the fashion of Japan and the nations of Southeast Asia they have built their exports predicated on restricted capital markets which means that China is managing capital to keep costs artificially low. This creates a system of bulk, maximum employment and a focus on market share as opposed to focusing on a rational return on investment.

It works, but only so far. If you are going to focus on exports-China's consumer sector is about the same size as France's 60 odd million consumers-then you need buyers. The US was the buyer of choice. Since the financial crisis the US's imports from China are down about a fifth.

The Chinese haven't stopped producing, yet. To do so would create massive unrest. But if you produce goods that no one buys, you end up with waste. This also means that a lot of loans made to state-linked enterprises are probably not good loans. And last year China made loans equal to about one third of their GDP. Waste and bad loans? Sounds dicey.

Now remember one last bit of the puzzle. One of the reasons the Chinese could export so much to the US is that since 2000 they have Most Favored Nation status. Right now the fact that China is one of the largest buyers of US Treasuries-and the US has a lot to sell-makes it unlikely that this would be revoked. Indeed, last week the Deputy Secretary of State James Steinberg told reporters in Washington that the US reaffirmed it does not support independence for Taiwan and restated its policy that Tibet is part of China. All this after a series of dismal treasury auctions. Next week is another auction. If that goes poorly...

Now back to India. Why is it that Mr Roubini is advocating that India emulate China?

I have no idea.