The US Slowdown and What does it mean for Asia? Part II

Regular readers know I have for many months been of the view that the US economy is very likely to experience a slowdown if not outright recession as a result of the housing recession and the fact that the US consumer, prior to the housing meltdown, was in such a vulnerable state. Please don't talk to me about the low unemployment rate. Firstly it is lower than one might expect today not because of rapid job growth but because of sluggish labor force growth. Secondly, unemployment will certainly grow as the full force of the housing collapse works it's way through the construction, mortgage, banking, and other industries This week the number of announced layoffs is already in full swing.

Anyway, the big question is not what will happen in the US, it is what will happen in Asia. For those of us who are long term bulls on Chindia, this is the big test we have been waiting for. In one sense, it is a good thing. Valuations - not to mention emotions - were getting crazy as double digit economic growth mixed with unlimited capital. Now there will be maybe a bit less growth and certainly less capital, at least less foreign capital. My first thoughts on this issue were pretty straightforward: China, no problem; India probably okay but a small but not insignificant risk of a balance of payments problem. Let's look at this again.

In one sense, we can think of a bit of global headwinds as accentuating the advantages that China already has over India. Let's take infrastructure - human and physical. China has done a far better job than India in this respect and the gap grows every year. As foreign investors are likely to become more risk averse, as declining global stock markets are likely - at least initially - to make foreign investors less willing to invest in Indian stocks, India will have an even greater difficulty in financing infrastructure projects. The fact that they have still not worked out some major kinks in terms of land acquisition and public/private financing structures, again makes what was a not so great situation into one that looks really pretty bad.

Indeed, the more I think of it, the more it seems to me that slower global growth (I also don't buy the idea that the World ex-US will grow nicely dispite a US recession; Japan and Europe both appear rather wobbly to me while LatAm and Russia will only grow if the rest of the world grows so don't look for any help from EM ex-Asia) and reduced global capital flows will provide a test to China and India which China is quite well positioned to pass whilst India seems poorly prepared for and just might fail. Don't get me wrong, I am still bullish on India longer term. But being a LT bull does not mean that we ignore the fact that there will be both economic cycles as well as the occasional crisis along the way. It is an old bit of wisdom, a bit of a cliche really, that real reform only happens (in any country) when there is a crisis. This is probably true, most of the time - the number of examples one can think of off the top of one's head are quite numerous - including of course, India herself. Maybe the answer to the question posed in the title of this post is the following:

China: nothing
India: crisis followed by the next phase of reform