Before returning to Cambodia to get involved in politics, I worked as a stock portfolio manager with Paribas Asset Management in Paris. This stimulated an interest in how stock markets reflect prospects for economic growth, which has never left me.
The stock markets of Asian countries such as China and the “new economic tigers” represented by Thailand, Vietnam, Malaysia, Indonesia, and the Philippines have significantly underperformed major Western and Japanese financial markets over the past three years.
This period encompasses the global economic recession or slowdown triggered by the COVID-19 pandemic, and also covers the beginning of the recovery that has followed for about a year.
Emerging economies in general were hit hard by COVID-19 because they heavily depend on exports to major industrialized countries such as the United States and Western European nations. Moreover, the disruptions in global production chains caused by COVID-19 weighed heavily on these so-called emerging economies, which occupy a vulnerable position in the new international division of labor.
The global economic recovery observed in the highly industrialized countries over the past year has not been mirrored in the stock markets of emerging countries. While stock markets in New York, Paris, Frankfurt, and Tokyo have grown by 14-21 percent over the past 12 months (from September 1, 2022, to September 1, 2023), many emerging countries’ stock markets are still struggling to recover. This is also true for their economies.
Asia’s major emerging countries like China and India, with populations of 1.4 billion each, as well as smaller “tigers” like Indonesia (270 million), Vietnam (100 million), and Thailand (70 million), stand out due to their rapid industrialization facilitated by abundant and relatively cheap labor. This development model, which boosted the growth rate of emerging countries for decades (up to 7-10 percent per year), turned against them during the COVID-19 pandemic because of the resulting slowdown in global trade.
The recent economic recovery in the most developed countries has only partially and belatedly translated into increased consumption and imports of manufactured goods from emerging countries. Furthermore, the ongoing decline in tourism continues to affect the economies of emerging countries like the five “tigers” mentioned above.
Even though they share the same economic development model based on export-led growth and public investment (aimed at strengthening and modernizing their infrastructure, which still cannot be compared with that of highly industrialized countries), and even though they all embrace the most advanced technological sectors to try to catch up with the West, emerging countries can exhibit structural disparities that affect their growth. These disparities help to explain stock market performances that can vary widely from one country to another, notably in the case of China and India.
These two most populous countries on Earth are also neighbors and rivals. They differ significantly on the political stage: while China remains the sole global communist power, India is considered “the world’s largest democracy.”
For a long time, economic growth in China (7-10 percent per year) was slightly higher than in India (6-7 percent). However, over the past five to 10 years, India has been catching up with China, which suffers from structural problems that were not very discernible before. These include Chinese Communist Party interference in private enterprise management, its prioritization of politics over the economy, an aging population, an unstoppable rural exodus, and youth unemployment.
China’s very strong growth over the past 20 years has partly been a catch-up from the destruction and production declines caused by political upheavals and errors (such as the “Great Leap Forward” and the “Cultural Revolution”) that had inflicted heavy damage on the country in the preceding 50 years. This catch-up effect has been gradually fading over the past decade.
Meanwhile, India is picking up speed through excellent macroeconomic management and a strong entry into modern technologies. This is making India the most dynamic power in the world. For 2023, India’s GDP could grow by up to 7 percent, compared to a maximum of 5 percent for China.
China’s future growth is at risk of being weighed down by a severe real estate crisis, which appears even more dangerous as property speculation has reached staggering proportions, jeopardizing the entire financial system. A severe housing problem remains to be solved: 20 years ago, one-third of the Chinese population lived in cities; now, this proportion has risen to two-thirds.
Such phenomena and differences between China and India cannot but be reflected in their stock markets. Over the past 12 months, the Shanghai Stock Exchange has declined by 1.67 percent, while the Bombay Stock Exchange has grown by 11.20 percent. Over the past three years, the rate of change became -6.70 percent for Shanghai and +71.10 percent for Bombay. The gap widens further in favor of India when observing the evolution of both stock exchanges over a longer period. Thus, over 10 years, the Shanghai Stock Exchange has grown by 42 percent, while the Indian equivalent has multiplied its index by 3.35. Over 25 years, the Chinese index has multiplied by 3, while its Indian counterpart has multiplied by 20. These diverging performances have provided a clear and consistent answer as to the likely winner of the economic competition between the two Asia’s giants.