Moderated by: Saurabh Mukherjea, CFA, CEO, Institutional Equities, Ambit Capital
Contributed by: Shravan Kumar Sreenivasula, CFA, IAIP and Birla Sun Life AMC
In a very candid presentation Andy Xie mentioned that in the early stages of economic development, China’s leadership was led by engineers all of whom led to massive creation of infrastructure. China produced only engineers in the 1980s who knew only one thing to do and that was to build. Even today the current government is filled with engineers who cannot comprehend not to build. It is very difficult to change the mindset now. China has built mega cities and moved people to inhabit there for the last 30-35 years like Shenzen. It is no longer required now. In the initial stages (like in 1980s & 90s) China had to build infrastructure without much heed to financials. The demand caught on making most of it viable. Now, with more infrastructure – one ring road beside another and rail road beside highway, it is becoming redundant. The Chinese problem of dependence on growth of Investment economy is structural and they would have to rebalance to consumption part of the economy. This rebalancing of economy would lead to huge Chinese consumption boom. Imagine the opportunities created if the GDP has to rebalance from 40% consumption to 60% as trillions of dollars’ worth of products will be bought.
On world economy, Xie highlighted that the United States will accelerate in GDP growth but it does not necessarily mean that world GDP will grow. Inflation is coming back. It is a mystery that the central banks have pumped in trillions of dollars to get inflation and now they deny accepting the data that inflation is coming back. He believes that this may make their task difficult to reign in inflation. He expects that the US Fed may hike more than 3 times, which is higher than the current market expectations. However, the US Dollar may not do much. The Chinese Yuan may not depreciate this year to prevent Trump from commenting on currency wars. In the last few days Yuan has moved up (onshore rates were raised to prevent shorts). If Yuan does not depreciate, the US Dollar would not appreciate. The days of easy monetary policy are behind us. Those countries who do not realize this may be affected negatively.
On India, India always seems to have potential but not much gets done. His advice to India was not to follow western metrics but just build. There is capital available from other countries, which should be used for building. He stated that China needs consumption & has investment and India has consumption & needs investment. China should come to India to build infrastructure.