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China and India: two systems, similar outcomes?

Graham Smith

Graham Smith - Market Commentator

One country, two systems – the principle underpinning the way in which Hong Kong would be governed after its handover to China in 1997 – has lately taken on a renewed prominence. As protests against proposals to allow extraditions to China spilled out of Hong Kong’s financial district into Kowloon this week, Britain’s foreign secretary stirred up a diplomatic row by pledging to stand by the city in protecting its democratic freedoms.

China and India: two systems, similar outcomes?

Among other things, the Hong Kong protests bring to mind the stark differences between how the world’s two largest emerging countries are governed. India’s Prime Minister Narendra Modi has recently embarked on a second term in office, after the largest democratic election the world has ever seen.

Mr Modi will be hoping for less opposition to his reforms programme this time round. The governing party’s election victory in May – that brought with it a comfortable lower house, parliamentary majority – means opposition parties will have less say from now on.

Despite helping to engineer generally positive economic conditions in India, Narendra Modi’s first term was marred by failures to bring about some of the key structural reforms necessary to make them stick around for the long term.

That single party majority will be called upon now, as economic growth has been slipping of late. Whereas India overtook China in the economic growth rankings in 2018, the position has more recently been reversed.

India’s economic growth slipped to just 5.8% in the first quarter of this year, a rate that might barely have seemed plausible a year ago, when the economy was growing at an annualised 8% or so¹.

On the face of it, India’s election outcome makes a rebound more likely. The prospect of a period of political stability, and finally an opportunity to alleviate some of the country’s infamous infrastructure bottlenecks should give it every chance. Given that India is such a large energy importer, a contained oil price ought to help too.

China currently finds itself in a similar boat, with growth sliding but tools available to turn the tide. While economic growth in the first quarter of this year held up well – at 6.4% - the escalating trade dispute with America will have taken its toll over the past three months².

A respected survey of conditions for Chinese manufacturing and services companies – the Caixin China General Services PMI – last week showed business activity growth slowing to an eight month low in June³.

In China’s economic favour, the fractious party politics that held back the first Modi government in India provide no similar obstacle in China. Here the government has already started to act – so far this year reducing corporate fees and taxes and allowing local governments to issue special purpose bonds to fund infrastructure projects, for example – to prevent the growth pendulum from straying too far⁴.

It could also call upon tactics it has used before, perhaps by offering further incentives to consumers to buy cars or white goods.

As such, it may be rash to bet against China achieving its official target of economic growth this year of between 6% and 6.5%, despite the likelihood the economy slowed in the last quarter.

For both China and India therefore, empowered governments – albeit hewn of diametrically opposed political systems – are in strong positions to keep their economies growing at a respectable pace. It is perhaps for this reason that markets have ridden the recent tide of softer economic data so well. 

A wild card for both countries at the moment is international trade. Last month, India lost its preferential trade status with America prompted, it was said, by India’s failure to offer reasonable access to its markets. 

Meanwhile, although talks at the G20 in Osaka earlier this month seemed to end positively, the stakes remain high for China. “No deal” with the Trump administration would be likely to cause Chinese exports to shrink more and put a further dent in economic growth, not least because of the likely effects of additional job losses in the manufacturing sector. 

At the same time, the progression of contentious proposed reforms in India – involving the liberalisation of labour laws and making it easier for investors in the country to acquire land – may yet remain elusive for now.

Election pledges – detailed in the “Sankalp Patra” – to provide pensions to small farmers, credit to entrepreneurs, and basic amenities and social security to all of India’s poor households – are, perhaps, much more likely to occupy centre stage over the next few months⁵.                                                         

Fidelity’s Select 50 list of favourite funds offers several routes to gaining an exposure to growth in China and India, predominantly via diversified emerging markets funds. For most investors, this seems sensible, given the potential for volatile future returns from each market individually.

The Fidelity Emerging Markets Fund currently has just over 60% of its portfolio invested in Asia, with large holdings in the Hong Kong insurer AIA Group, India’s HDFC Bank, China Mengnui Dairy and the internet retailing giant Alibaba.

The Asian growth theme is reflected in several other selections. The Stewart Investors Asia Pacific Leaders Fund is one. It focuses on companies that contribute to, and benefit from, economically and environmentally sustainable development, an approach gaining traction in a world increasingly and rightly attuned to sustainability.   

¹ National Statistical Office, Government of India, 31.05.19  
² The State Council, PRC, 17.04.19
³ IHS Markit, 03.07.19
⁴ Reuters, 16.04.19
⁵ Times of India, 09.04.19

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.