CNBC Business | THE NEW BEHEMOTHS IN THE BOARDROOM

THE NEW BEHEMOTHS IN THE BOARDROOM

China’s and India’s economies are expanding even faster than first supposed. David Smith says that this is part of an even bigger story

Tuesday, 27 February did not quite turn into a Black Tuesday for the global financial markets, though it might easily have done so. That day, stock markets around the world dropped sharply when share prices in Shanghai plummeted by nearly 9% in 24 hours – the result of rumours that the authorities were planning a new capital gains tax on share-dealing profits.

The effects were felt around the world, raising fears not just about China’s booming status, but also about other emerging markets and the wider global economy. If a tumbling stock market derailed China, what would it do to a world economy increasingly dependent on Asia’s growth contribution?

Those questions were never answered. Alarmed by the plunge, Beijing speedily issued a forthright denial of the tax rumour and, after a nervous few days, global markets recovered.

The episode was important because it underlined China’s growing economic and financial influence. China, and to a lesser extent India, are making economic waves.

What is different about China and India?

The answer is that we have never before seen the simultaneous emergence of two extremely populous, rapidly growing economies. China has 1.3bn people, a quarter of the world’s population. India has 1.1bn and will, by the 2030s, exceed China in population size. The dragon and the elephant are achieving, if this is not mixing too many animal metaphors, tiger-style annual growth rates of 8%-10% – sometimes more.

It is not a new story. China’s take-off began in 1978, and growth has since averaged more than
9.5% a year. India’s modern revival is usually dated to the economic crisis of 1991 and the reforms introduced as a result.

So, what makes China and India relevant now? Both countries have achieved critical mass in terms of their impact on the global economy and growth has accelerated as they have become bigger. These are the two key factors.

When we think of China and India, we think of the “China effect” on goods prices and the “India outsourcing effect” on a range of back-office and customer service functions, including call centres.

These are important, but they are part of a much bigger story. The global economy’s purple patch is its best run of growth since the early 1970s (longer if growth manages about 5% this year). This is not all due to the simultaneous emergence of China and India, but the opening up of both economies – effectively doubling the global labour force – has been hugely significant.

How long can this go on?

Goldman Sachs believe by 2050 the top-two economies in absolute GDP terms will be China and India. In the case of China, that prediction is based on growth slowing to around 5% a year by 2020 and 3% by the 2040s. India, because of its later start, is predicted to grow by 8% a year until 2020, before slowing.

Along the way there will be upsets, genuine Black Tuesdays and longer downturns. Expectations are high in both China and India, and these setbacks will not be politically easy to handle – but the global economy is shifting to Asia and the rise of China and India is irreversible. Every investor and every business should bear that in mind.

David Smith’s new book, The Dragon and the Elephant: China, India and the New World Order, is published by Profile Books, priced £15 (€22) www.economicsuk.com