EM1. Emerging MarketsIn the late 1980s, the emerging markets started to become an interesting investment for institutional investors who sought to maximize their investments’ returns based on the simple but powerful justification. That is represented by the idea of investing in these markets at an early stage of development so they can benefit from the rapid economic growth and also the considerable potential that these markets have, made them very attractive investment opportunities. – Fig 1.Figure 1Source: MSCIThe graph below shows that in a period of 20 years the weight of emerging markets in the MSCI All Country World Index (ACWI) has increased from 1 % to 12 % leading to a radical change in the opportunity set available to international investors.
” Fig 2 (ETF.com, 2008)However, in the last decade, the speed at which the MSCI Emerging Markets Index has been growing has slowed down, from a peak of almost 14% in 2010 to a low of less than 10% in 2016 and presently at 11%. Appendix 1Figure 22. China and IndiaThe aim of this report is to assess the possibility of India overtaking China as the world’s most successful emerging market in the global economy in 20 years time by looking at the economic growth of the two countries over the last 20 years and analyzing their economic and financial reforms and policies, and legal systems.
In figure 3 we can see the evolution of both China and India and this is represented by the weight of each country in the MSCI Emerging Markets Index. Therefore, we can observe that in 1998 the weight of India was much bigger than China’s weight, but by 2008 China was able not only to shrink the gap but even gain a superior weight than its rival.
By 2018 this gap further increased in India’s detriment. (FactSet, 2018)Figure 32.1. Economic and financial reforms and policies, and legal systems.Both China and India exert remarkable economic growth and their vast populations gave them the opportunity to become two world powers of great significance whose economies are exceeded only by that of the US and all this despite the low average income. Nevertheless, the economies of China and India are well integrated into the world markets and financial exchanges and consequently being critical in preserving a peaceful international scene during the 21st Century. An important aspect of the economies of these two countries is represented by their ability to maintain a positive rate of growth following the financial crisis of 2008 while most of the worldwide countries failed to do so.In the Fifties, the national economies of China and India were more or less at the same level. However, following the opening of foreign investments and the reforms promoted during the 1970s, the Chinese economy recorded massive growth and has exceeded the Indian economy in every category. These extraordinary results have been called the Chinese Miracle. The development of the manufacturing industry has transformed China into the factory of the world and has created an industrial substrate sustainable in the long term. Many economists use a metaphor when they compare China and India in terms of economy and development associating China with a dragon and India with an elephant with the former having a decisive advantage over the latter. Since 1978 when Deng Xiaoping propelled the Chinese economic reform, the country has passed from a closed, centralized economic system to a market economy. The reforms began with the demolishing of the communal systems in the countryside, moving on to the liberalization of prices, to fiscal decentralization, to greater autonomy of state companies, to the development of the private sector, to the development of a financial market and to a modern banking system, up to the opening of business abroad and the direct foreign investments. Appendix 2 shows the milestones regarding the Chinese policies and reforms which influenced the economic growth and the factors within it.However, India is gradually becoming a market economy. In the 1990s, the government set the stage for economic freedom measures represented by the deregulation of the industrial sector, privatization of principal state agencies, and a reduction on controls on commerce and direct foreign investment. These legislations and politics allowed India to reach an important growth rate of 7% per year from 1997 to 2017. Approximately half of the workforce is employed in the agricultural area, but the real spine of the Indian economic growth is in the service sector. In 2011, the Indian economy decelerated due to abnormal interest rates, growing inflation and investors’ pessimism regarding the will of the central government to promote greater economic freedoms. Nevertheless, starting in 2012, the Indian economy has recovered and grows thanks to government investments, measures introduced to reduce the deficit, and also thanks to greater participation on the part of foreign firms. Appendix 3 shows the milestones regarding the Indian policies and reforms which influenced the economic growth and the factors within it.2.2. ExportsChina has been the world’s largest exporter of goods since 2009. Official estimates suggest Chinese exports amounted to $2.263 trillion in 2017 and surpassed Japan in terms of gross internal production. Nevertheless, we can observe from the table below that the exports managed by India created a value of $298 billion, which represents a fraction of China’s figure. More recently, exports from China surged 9.1% from a year earlier to $217.6 billion in January 2019, defying markets’ expectations of a 3.2% fall and reversing a 4.4% drop a month earlier. The rebound in overseas sales came in amid signs of trade talks progress and efforts from companies to ship out goods. Exports from India rose 3.74% year-on-year to $26.36 billion in January of 2019, mainly driven by sales of chemicals (15.56%); drugs and pharmaceuticals (15.2%); ready-made garments (9.33%); gems and jewellery (6.67%) and engineering goods (1.07%). (Statista, 2018) – Appendix 42.3. GDP and PPPThe Gross Domestic Product per capita in China was last recorded at $15,308.71 in 2017 when adjusted by purchasing power parity (PPP). The GDP per capita, in China, when adjusted by Purchasing Power Parity is equivalent to 86% of the world’s average. GDP per capita PPP in China averaged $6,479.38 from 1990 until 2017, reaching an all-time high of $15,308.71 in 2017 and a record low of $1,526.40 in 1990. The Gross Domestic Product per capita in India was last recorded at $6,426.67 in 2017 when adjusted by purchasing power parity (PPP). The GDP per Capita, in India, when adjusted by Purchasing Power Parity is equivalent to 36% of the world’s average. GDP per capita PPP in India averaged $3,369.50 from 1990 until 2017, reaching an all-time high of $6,426.67 in 2017 and a record low of $1737.60 in 1991. (Tradingeconomics, 2018)However, in Appendix 5 we can see an interesting study conducted by Vanguard which shows that economic surprises can be an important factor in short-run fluctuations in emerging markets stock returns.2.4. FDI and Exchange Rate SystemsIn December 2018, FDI in China amounted to $134.9 billion, while in India that number is decidedly less, equal to $2.657 billion. The restructuring of the Chinese economy has increased the gross internal production tenfold since 1978. Measured in terms of buying power equivalent (PPA), in 2015 China became the largest economy in the world, passing the United States for the first time in history. China has experienced extraordinary growth in the last ten years in terms of gross internal production and only in the last years has shown some weaknesses, recording a general growth of 6.8% in 2018. Contrariwise, India has surpassed China in terms of speed of growth, recording a general growth of 7.4% in 2018.In July 2005, China moved to an exchange rate system that references a basket of currencies, notwithstanding with its previous efforts to keep its currency closely linked to the US dollar for years. From mid-2005 to late 2008, the renminbi appreciated more than 20% against the US dollar, but the exchange rate remained virtually pegged to the dollar. From 2013 until early 2015, the renminbi appreciated roughly 2% against the dollar, but the exchange rate fell 13% from mid-2015 until end-2016. In 2017, the renminbi resumed appreciating against the dollar ” roughly 7% from end-of-2016 to end-of-2017.In 2016, the Indian currency ” rupee experienced a sharp depreciation as investors shift capital away from India because of the macroeconomic imbalances and good economic conditions in Western countries. Previously to this result, investors’ opinions of India enhanced in 2014, due to a decrease of the current account deficit and beliefs of post-election economic reform, causing a surge of inbound capital flows and stabilization of the rupee. After the election, the government has agreed on imported goods and services tax bill and raised foreign direct investment caps in some sectors. Despite an extraordinary growth rate compared to the rest of the world, India’s government-owned banks faced mounting bad debt in 2015 and 2016, resulting in low credit growth and restrained economic growth.Recently, China and India have figured out that their exclusively dependence on the industrial and service sectors doesn’t represent long-term viability and this is reflected by some complications in terms of economic growth. The decrease of dependence on foreign commerce is required and both countries have to promote a more far-reaching economy in order to avoid being trapped in the chain of international production.2.5. Level of development in China and IndiaFrom the table below we can observe that China’s economy is slowing and this decline may be the result of recent events – the trade war with the U.S., or retrenchment in China’s real estate and infrastructure sectors. However, there is also the possibility of a trend that began a decade ago signalling that China’s entire system of authoritarian state capitalism is less effective than many had believed.It has been a good period of time in which India was shadowed by the development and evolution of China, but in the last couple of years, India became the fastest growing major economy on the planet. The attitudes about this growth are generally positive and the development is underpinned by a young population and corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy.One of the illustrations of this progress that India had made is highlighted by India’s equity market which has been outperforming China’s market by a big margin in recent years. In the last five years, iShares S&P India 50 was up 45.87%, beating China’s comparable ETF by almost two to one – see table.Moreover, while China represents a model for India in terms of economic development marked by the incredible progress it exerted, India managed to beat China in one metric that matters the most to emerging market investing: financial market development. India ranks 42, while China ranks 48.3. ConclusionsThe comparison between China and India is relevant only if the ratios are compared rather than the volume as China’s growth rate has been consistently higher than India’s growth rate over the past three decades gaining a significant margin. Only if India can continue to beat the Chinese growth rate by a huge margin for the next two to three decades, India has a chance of overtaking the Chinese economy.A relevant discussion when we try to forecast how the economies will perform in the future is by looking at the inflation of both countries. While China’s inflation has been relatively stable at a negligible 0.8% for many years even though it has been recording fiscal surplus for the past many years, India’s GDP growth has been accompanied by runaway inflation in the country. Growth rate accompanied by inflation cannot last for a long period of time. It is unlikely that India will be able to compete with China in the long run, given the inflation imposed by its Monetary Policy.China manufactures a lot more than India does. It also does so extraordinarily more efficiently. Given the better-quality infrastructure and better production techniques at China’s disposal, it is not astounding that the average Chinese worker produces 1.6 times more output than that of the average Indian worker. This means that the productivity of China as a nation is 60% higher. The Indian manufacturing sector has multiple problems. These problems include erratic electricity supply, slow and expensive transport systems as well as lack of skills that increase manufacturing productivity. Given that a large portion of these problems is structural in nature, it seems unlikely that India will be able to overcome them in the near future.To conclude, even if the Indian’s growth is faster than the Chinese, the Indian economy and its process of development are far from passing their Chinese counterparts. In 20 years time, India can shrink the gap between the two economies, but it is very unlikely that it will be able to exceed China’s economy. In conclusion, even if the Indian economy were to grow faster than the Chinese, India would need an enormous period of time before reaching a level of development and complexity on a scale with the Chinese economy.
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