India and China: Not so decoupled from the global downturn

C.P. Chandrasekhar

With growth recovering significantly in China and India, these countries are once again being presented as decoupled giants who can revive the world economy. Advocates of “decoupling” argue that, despite the force of globalisation, some economies are relatively unaffected by the economic cycles characterising the rest of the world because the factors driving their growth are sui generis. However, this view has been discredited in recent years for two reasons. First, there appears to be a high degree of synchronisation of booms and busts in stock and housing markets across the world. If the appetite for investment among wealth holders or even wealth seekers was stoked anywhere in the world, such investment found its way across the globe, reviving diverse markets simultaneously, even if to differing degrees. The reverse was true when bearish sentiments prevailed.

The second challenge to the decoupling theory came from the depressive impact that the slowing of global trade had on growth in China and India. According to the World Bank’s World Development Indicators, before the onset of the crisis (2007) exports of goods and services amounted to 43 per cent of GDP in the case of China and 21 per cent in the case of India. This level of export dependence would imply that a trade downturn would adversely affect these economies. It did, and challenged the notion of decoupling.

But the recent revival in stock markets and in GDP has led to a revival of the decoupling theory. This is surprising because liberalisation leads to “coupling” not just through increased dependence on global markets, but through the restructuring of the financial sector that homogenises regimes of accumulation across countries. Specifically, financial liberalisation and the reliance on monetary as opposed to fiscal levers to promote growth result in the displacement of deficit-financed state expenditure by debt-financed private expenditure (on housing, automobiles and general consumption) as important stimuli to growth. When monetary policy is lax, credit is easy to obtain, and interest rates are low, one also witnesses enhanced credit-financed consumption and an acceleration of growth. When banks and financial institutions are less willing to lend, and households are less willing to borrow because of economic uncertainty, one sees a cutback in debt-financed private expenditures and a downturn.

This disease now seems to afflict most countries pursuing market-friendly growth strategies. Consider China for example. A recent report from the OECD points to the growing role of debt-financed housing investment and consumption in driving demand, even when the state remains an important player. It has been known that consumption demand from China’s new rich and well-to-do urban professionals has been rising rapidly in recent times. Housing investment is on the rise, triggering a boom. The highest decile of urban households numbering 50 million people earned an average household income of $30,000 in purchasing power parity terms in 2007. More than a third of these households had already acquired a car. These households also bought consumer durables ranging from air conditioners to flat screen televisions. Consumption of this kind was also percolating downwards. The ownership rate for cars in the 8th decile was similar to that in the highest decile four years earlier.

The point to note is that not all of this consumption was financed out of current income or past savings. Debt played an increasingly important role. In 2000, consumer loans totalled RMB 426.5 billion, of which RMB 337.7 billion financed housing purchases and RMB 18.8 billion financed automobiles. By 2008 the corresponding figures were RMB 3723.5 billion, RMB 2980 billion and RMB 158.3 billion respectively. That points to a scorching pace of growth of credit, which has taken outstanding consumer credit to 12.4 percent of China’s GDP in 2008. This is not, however, just a Chinese syndrome. The same OECD report quotes a McKinsey Global Institute study which places consumer loans at 18 percent of total advances in India and nearly 50 percent in Malaysia.

These trends point to the homogenisation of the regime of accumulation across countries. This sets up another route through which booms and downturns can be synchronised. In a globalised financial world the state of liquidity, interest rates and the monetary policy stance of central banks in different countries are interdependent and similar. Periods of easy money are generalised through cross-border flows of capital. So are periods of credit stringency. This generalises credit-financed booms and credit constrained downturns. In the event domestic stimuli rather than just trade dependence tend to be coupled. So does growth.

7 Responses to “India and China: Not so decoupled from the global downturn”

  1. Export dependence is not the worst problem in the case of India. I was surprised at the current account position (around 4% of GDP in 2009), that has been negative and worsening since the beginning of the crisis. It is probably sustainable, but it underscores the significant differences between India and China.

  2. Kevin P. Gallagher says:

    Latin America, despite news to the contrary, is also far from de-coupled from the crisis. Indeed, the region has been hit by three channels–trade, remittances, and corporate debt. Most of the Latin American growth in the run-up to the crisis was driven by trade. So, of course when trade collapsed so went LAC economies. ALso, many Latin Americans, especially Mexicans and Central Americans, were working as laborers in the housing market and subsequently sending significant amounts of money home in the form of remittances. Indeed, despite oil booms and massive FDI, remmittances were the largest form of foreign investment in Mexico for numerous years since 2000. The housing market of course, and the US economy, has gone sour. Many of those people are out of work or hoarding their funds, to the detriment of many in Latin AMerica. Finally, Latin America became famous for its “Trans-Latins”–domestic firms that had gotten big enough to invest outside Latin America. Those firms, like most economic actors, saw global demand as insatiable. They thus borrowed in US dollar denominated bonds. When their currencies dropped as a result of the trade drop and other factors, the value of their debt of course sky-rocketed. This has left many firms on the edge, selling their assets at bargain basement prices. Indeed, CEMEX, the Mexican owned cement firm once the largest in the world, is having a firesale. It is also hoping to restructure its debt. However, some of that debt is intertwined in credit default swaps and some of the bondholders don’t want to restructure (because they make money when Cemex defaults)–accentuating the situation…

  3. It seems to me that globalization has helped to produce a “death star” economy. Like the ship in Star Wars, it provides an inpregnible defense until something goes wrong in just the right case. This was certainly the case with the CDO markets as managed by Merrill Lynch, AIG, Bear Stearns, and Lehman Brothers.

    The sophistication of marketing private credit instruments globally coupled with the laxness or inability of the Federal Reserve or other regulatory agencies of the United States led the way to the current crisis. Given the current state of governance in Washington, it’s highly unlikely that full and adequate standards of re-regulation can be adopted by the US government.

    And this situation is compounded by the conflicting financial regulations of the G-20, which should ideally be sufficiently harmonized to define what are levels of acceptable vs. unacceptable risk.

    The net result of the current situation is to create conditions of arbitrage that can be exploited by hedge funds and other major movers of financial capital to their own advantage, and to the disadvantage of everyone else.

    Clearly, some kind of worldwide monetary authority is needed to control this or any other type of financial conflagration. The economic issues alone between the US and China are enough to provide the environment for another catastrophic breakdown of the system in the future.

    So, the ultimate question is, what form should a world monetary authority take, given that national differences impede co-operation and implementation of uniform regulatory standards?

  4. T R Nagesh says:

    There has been a major shift in the attitude of Indian and Chinese customers towards credit. They have been open to credit notwithstanding their financial condition. With retail credit still constituting a small percentage of total advances compared to other S.E.Asian countries, there lies a huge scope of credit growth. In due course, demand is set to rise in this two countries, though the rise may be steady. As such, the notion of decoupling still holds good.


    In absence of global uniform currency most finance and investment data would be misleading and distorts economic decisions. There is demand and competency among various countries in the world to put forward their currencies as global making their currencies exchangeable involving multiple exchange gyrations enhancing finance deficits in every country in the world to capture economic resources making world economy as highly debt financed consumerism that was born in developed world and diffused to developing world too with shift of employments and absence of achieving full employment in the global village. In the process big investors and employee managers are managing loosely coupled finance, investment, tax and bank laws to their favour hoarding large currencies in tax and bank heavens as there exists no multilateral investment and finance laws in the global village. In the process there is relocation of capital formations with rat race among large investors hoarding their profits and gains in tax and bank heavens putting all countries loosely coupled at the comfort and convenience of big investors who are today controlling policy makers of the world with their cartelised lobbying. Issues cannot be addressed by comment. Already I happened to address the issues of our global village in the book CHALLENGES BEFORE GLOBAL VILLAGE in Doha and beyond and another research study undertaken and completed for the Institute of Chartered Accountants of India on CROSS BORDER MERGERS AND ACQUISITIONS that was approved in principle with pending final approval by Members of the Committee on Trade and Economic Laws of the said Institute. Thanks for inviting me to comment. Presently I am doing research on the necessities for Global Uniform Currency looking for viability and implementation with needed methodologies for the same in the Global Village.

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