Some time ago, when the world was
suffering the worst of the global depression, Hu
Jintao, the Paramount Leader of the People’s
Republic of China, and Wen Jiabao, Premier of the
State Council, coined a phrase, ‘Maintain Eight’. It
meant that come hail or high water, or whatever else
they say in China, the country had to achieve no
less than 8 per cent GDP growth. As far as the Party
was concerned, it was the bare minimum to keep
unemployment in check and maintain social and
political stability.
China has succeeded, with some spare change to boot.
According to National Bureau of Statistics, the
Chinese economy grew by 8.7 per cent in calendar
year 2009 compared to 2008. In Q1 it was 6.2 per
cent; in Q2 it rose to 7.9 per cent; Q3 was up to
9.1 per cent. And there was a growth surge in Q4 to
10.7 percent. All of this, including the $586
billion two-year stimulus package, led to an average
annual growth that was a good 70 basis points above
Messrs Hu’s and Wen’s ‘Maintain Eight’. The
consequence of being the fastest growing large
economy of the world is that China now has a GDP of
around $4.9 trillion; and it has overtaken Japan in
the global GDP sweepstake. The forecast for China’s
growth in 2010 is somewhere between 9.5 per cent and
10 per cent.
Move on to India. As we come closer to 31 March
2010, it seems pretty clear that India will achieve
something like 7 per cent growth. When a
conservative body like the Reserve Bank of India has
for 2009-10 growth revises its GDP growth for
2009-10 upwards from 6 per cent to 6.9 per cent, you
can pretty sure that number will be closer to 7.2
per cent or thereabout. That translates to a GDP of
something like $1.3 trillion. Maybe even $1.4
trillion. The forecast for India’s GDP growth in
2010-11 varies quite a bit, but nobody is making a
bet far below 8.5 per cent.
So, there we have it. The base case is of one $4.9
trillion economy growing at around 9.5 per cent
compound; and another $1.4 trillion chap growing at
around 8.5 per cent. That, ladies and gentlemen,
translates to pretty stupendous growth. It is a $6.3
trillion behemoth growing at a weighted average rate
of 9.3 per cent per year. And if this growth was to
persist for five years, China would have a real GDP
of $7.7 trillion and India $2.1 trillion — or $9.8
trillion adding the two.
Is this feasible given the current growth drivers?
That’s my question to which I have no clear answer.
But it is something that I want to get to the bottom
of. Let me share with you my worries. Predominantly
China, but also India, need a great deal of natural
resources to fuel this growth. Here are a few:
hydrocarbons (oil, gas and coal); base metals (mild
and finished steel, copper, aluminium, lead, zinc,
nickel, tin and silver); basic food (rice, wheat,
edible oils, pulses, sugar, vegetables, fruit and
dairy products).
My question is simple and yet all too difficult to
answer: Can the world produce enough of these key
commodities to fuel an average trend rate of growth
of 9.3 per cent coming from China and India as a
whole? Are their supplies elastic enough? Or will we
see a period of rapidly rising commodity prices — as
we did for eighteen months before Lehman became a
household world?
My guess — and please note the word ‘guess’ — is
that we are probably looking at a serious hardening
of commodity prices as global producers keep running
short of demand. Consider hydrocarbons, for
instance. There is neither enough discovered
resources to meet this stupendous growth over such a
high base; nor enough refining or delivery capacity.
That’s why China is in an all-out race to capture
oil, gas and coal resources across the globe. It is
the same with food. In fact, worse, because two
things will happen. For one, demand for all food
will increase in the aggregate. For another, as
households get better off, they will spend
relatively more on higher value food such as sugar,
fruit, dairy products, meat, confectionaries and the
like, which will further increase demand. Global
food suppliers haven’t seen China and India together
grow at 9.3 per cent from $6.3 trillion today to
$9.8 trillion five years from now. I can’t see how
they can ‘over-supply’ this growth.
If China and India stoked global commodity and food
inflation, then we should expect tighter monetary
policy in both countries to control price rises.
What will that do to growth? Again, I have no
answer. Except to say, forget about U- and W-shaped
recoveries, and focus on the inflationary threats to
Asian growth.
Published: Business World, February 2010