The Problem With China and India's GDP, According to a Star Economist

  • No major Asian economies can sustain 7% in foreseeable future
  • China can avoid a financial crisis but growth will slow

The two biggest emerging markets are probably growing much slower than official data suggests, part of a trenchant downturn in growth seen around the globe, according to Ruchir Sharma, head of emerging markets equity and global macro at Morgan Stanley Investment Management.

China’s gross domestic product is more likely expanding 4 percent to 5 percent than the official rate of more than 6.5 percent. India’s pace is probably five percent to six percent, instead of the stated number of almost 8 percent. "That’s my best guess," Sharma, author of the best-selling book "The Rise and Fall of Nations," said in an interview in Hong Kong this week.

One upshot is Sharma, who made the Bloomberg Markets 50 Most Influential list last year, seeks to limit his investment exposure to China. Sharma helped manage over $20 billion in assets as of March 31, according to Morgan Stanley’s website. His latest book identifies ways to identify political, economic and social changes in real time, and draws on his practice of spending one week a month in a different emerging market to meet people including policy makers and executives.

Here are excerpts of the conversation:

Ruchir Sharma.
Ruchir Sharma.
Photographer: Chris Goodney/Bloomberg

Question:

What’s your concern about Chinese and Indian GDP data?

Answer:

The two countries where the numbers are maximum in question in the entire emerging world are China and India. This is a real problem.

Question: 

What’s the issue exactly?

Answer: 

There’s a big difference between what’s happening in India and what’s happening in China. I think China has been smoothing it out, every quarter you have to show a growth rate of about 6 percent, that’s the way it is. In India you’re having incompetence because the statistics bureau there is applying a new methodology not having tested it well. It’s quite possible it could be a basic error like getting the GDP deflator wrong. It’s credibility in a different way, it’s one of incompetence not one of managing the numbers as such. 

Question: 

You won’t be convinced by China’s official GDP due for release on July 15?

Answer: 

You don’t get an economy of China’s size with zero volatility with the number every quarter to reach the target. In India it’s just incompetence, it’s not one of managing the numbers. There was no question about the credibility of these numbers until February 2015, when they changed the methodology.

[Note: China has acknowledged some weaknesses in its data, and the new head of China’s statistics bureau, Ning Jizhe, is pushing to raise their quality. India’s statistics agency declined to comment on questions about its figures overstating growth, and has said the latest GDP series captures increased value of goods, versus just the number of units of goods under the old system.]

Question: 

How do you get a handle on the real pace of growth then?

Answer: 

I’m not saying China’s growth is zero. The new economy is doing well, and there are pockets of growth. But the old side of the economy is doing so poorly that to get to 6 percent to 7 percent is impossible. We try to have a look at the purchasing managers’ surveys to see where the economic momentum is, and other measures such as electricity consumption and freight traffic and some new-economy stuff. Basically, trying to create your own alternative measures. Even the Li Keqiang index is a bit outdated. In India it’s the same, the same cottage industry of coming up with your own assessment of what the alternative indicators are showing. Everyone is coming up with their own methodology.

Question: 

Can China avoid a debt crisis?

Answer: 

They can avoid a financial crisis but I don’t think they can avoid an economic slowdown, which is what’s already happening. Nearly half of the new debt is just to pay off old debt and the interest. There is little new money left. Today it is taking six dollars of debt to create a dollar of GDP growth in China.

Question: 

So what’s your investment strategy?

Answer: 

I’m a long-only investor and the way we invest is what I call the "post-China world" investing. China’s growth is probably like a ping-pong ball bouncing down the stairs. Every time the slowdown appears to get a bit severe, they put a new stimulus in place and they get a spike. The moment that stimulus wears off, they go back down again. From a long-only side I am very clear about being underweight China, keeping away from stuff which is exposed to China.

Question: 

What’s your outlook for Asian growth?

Answer: 

The baseline for economic success has to change. We are now in a much lower growth world, the global economy today is growing at barely 2 percent or so, depending on what you think China’s numbers really are. Compared to the last few decades when trend growth was 3.5 percent or so, this is a major step down. There is no region in the world today growing at the same pace as before the 2008 financial crisis. Let’s not look for the 7 percent type of economic growth that we thought were going to be the miracle stories. I don’t think there are any major Asian economies that I see growing at a sustained pace of about 7 percent in the foreseeable future.

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