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Alarm bells ring for ’growing’ India, China

Tuesday 19 December 2006

Washington, December 19: India and China, which have been growing rapidly in a relatively favourable external environment so far, have to come to terms with some critical problems in their financial systems, say experts.

But with the world economy likely to slow down, China may face a potentially large number of new defaults on non-performing loans, Jahangir Aziz, the China division head of the International Monetary Fund (IMF), has said.

A key reason for this, he said, could be falling consumption in the world’s most populous nation, which had been expanding on the back of rapid investment and trade surpluses.

"The question is, can China keep on expanding its export markets without seeing a rise in protectionist pressures or more stiffer price competition from its competitors in a world economy, which is not growing as fast as it used to in the past few years," he posed.

They "could lead to a potentially large number of new loan defaults on non-performing loans" and "an adverse banking sector," Aziz said, at the launch of two new IMF books on the expanding role of China and India in the world economy, in Washington.

The threat facing China came at a "very unfortunate time" as Beijing had just completed or was almost to complete a very large recapitalization of the banking system.

"If this banking system is now faced with another spate of new non-performing loans, then that is going to push back the reforms that took place over the last few years," he said.

But Aziz pointed out that Beijing was aware of these issues and implementing reforms, which "might actually work and China just may not have another crisis."

India, on the other hand, may see an end to its dangerous living with high fiscal deficits amid the expected slowdown, another expert told the forum. The country’s fiscal deficit in the last financial year was 4.1 per cent of gross domestic product.

A major challenge is whether India could absorb a possible shift in the global environment, which has been largely "benign" in recent years, T N Srinivasan, professor of economics at Yale University, said.

"High fiscal deficits did not create a crisis in my view largely because of this global benign environment...that masked the otherwise pernicious effect of high fiscal deficits," he said.

Another "concern," he said, was that India’s public sector owned 75 per cent of the assets of the banking system.

"This, in my view, is too large to have any credible way of market controlling the behaviour of the banks, and so there I would urge more disinvestment of public assets in the banking system," he said. Noting that India is still is one of the most protected economies in the developing world, Srinivasan also called for a firm commitment from India on making its rupee currency fully convertible.

"I am for committing to the full convertibility of the rupee in five years. If you do not commit yourselves you will never do the reforms at the pace that is needed to do in the financial sector," he said.

In the first half of this fiscal year, India has been growing at 9.2 per cent compared with about 10.4 percent in China. While the two countries face very different challenges, Pei Minxin of Carnegie Endowment for International Peace, a Washington-based think tank, said India could outperform China in the next decade.

"If I have to pick and choose, I would pick India as the country that is most likely to outperform China in the next decade or so, probably even longer," he said.

Pei forecast that overinvestment in China could lead to overcapacity and a "massive problem of nonperforming loans and that triggers financial panic".

"The next round of banking crisis, if it takes place given the massive explosion of credit in China in the last five years, probably will not be much smaller than a trillion dollars," he said.

"So China probably is going to see its foreign exchange reserve, the largest in the world today, evaporate in the next round of banking crisis," Pei warned.

If China does not embrace reforms, "it is just a matter of time" before it succumbs to a crisis, he said.

The World Bank said last week that global economy had reached a potentially dangerous "turning point ".

It predicted growth in worldwide gross domestic product (GDP) of 3.2 per cent in 2007, down from a projected 3.9 per cent this year.

See online : The Indian Express

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