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Economy

India's chief economic adviser sounds warning bell on China

Calls the country a 'big source of systemic risk'

Arvind Subramanian, the Indian Finance Ministry's chief economic adviser, shared his views on China. (Photo by Kenji Kawase)

HONG KONG -- The rivalry between Asia's two powerhouses -- China and India -- could be one of the most hotly debated topics of our time, one that grows still more interesting through the lens of a senior government official.

When asked for his view on China, Arvind Subramanian, the Indian Finance Ministry's chief economic adviser, said the country is a "big source of systemic risk." His wariness over the northern neighbor comes from the medium-term risks stemming from a rapid accumulation of credit. "How do you resolve this credit surge that is associated with [various] events?" he said in an interview with a few media outlets, including the Nikkei Asian Review, on Wednesday at an investment forum here sponsored by Credit Suisse. Before taking the job as government adviser in 2014, Subramanian, an economist, authored a widely read book on China's rise.

For him, the mounting leverage in the world's second-largest economy is "probably the biggest issue confronting the global economy, apart from [U.S. President Donald] Trump's retreat from globalization and all that." He recognizes both optimistic and pessimistic sides of the debate and refrained from giving his own prediction. "Nobody knows how it's going to pan out," he said, drawing a parallel with how political reform in China has not materialized even after economic development. "At some point, politics has to catch up with economics, except that we waited and waited and waited and [it] hasn't happened."

Different from China

Subramanian also drew a line between his country and China on the issue of the credibility of economic data. India's sudden change in calculation methodology for gross domestic product in 2015 has invited suspicion by some, but Subramanian staunchly defended the move, saying the "notion that Indian GDP data is under political influence is complete nonsense." Even though his position as chief adviser does not represent the administration, he stressed the country has a "completely independent, technically staffed statistical agency."

During a session at the forum, he rejected a question aligning India with China on this issue. "I want to assure you that it's not the case," he said. "I don't know what China does, [but] certainly their GDP is much less volatile than ours," using sarcasm to refer to the stable and predictable figures Beijing has reported in recent years.

The unreliability of Chinese GDP has been widely acknowledged even by Premier Li Keqiang, as head of Liaoning Province 10 years ago. Li, an economist by training with a doctorate degree in economics from prestigious Peking University, reportedly told American guests that he distrusts his country's GDP and uses three proxy indicators -- railway cargo volume, electricity consumption and bank loans -- instead. The so-called Li Keqiang index, a mix of the three indicators, is widely accepted in the investment community.

In terms of financial market liberalization, Subramanian recognizes both countries are taking a "very gradual, steady, calibrated approach." But here again, he mentioned how the Indian equity market is "far more open than [the] Chinese [one]" in accepting foreign investment. Indeed, channels of investing in mainland Chinese equity markets are still limited to specially-sanctioned institutional investors tied to a quota or using a special trading arrangement through the Hong Kong bourse.

Lessons to learn

Subramanian, however, praised the rival as well. When referring to India's so-called demographic bonus, which is mostly happening in states that are "less well-governed [and where] economic prospects are weaker," he turned to China for lessons.

"The number that always strikes me is on [Lunar] New Year's when 300 million people board the train to go back to their towns," he said. To his eyes, the mobilization of the population in the past few decades from underdeveloped rural areas to urban centers, where demand for cheap labor is high, has brought about the "dynamism" of the Chinese economy. Although this policy was based on a household registration system that discriminates against rural citizens and has created serious social issues such as separated families and rural children growing up without proper parental care, Subramanian said he wishes something like that could be done in India for the sake of economic development.

On the hotly debated issue at home of how to deal with banks burdened with substantial amounts of bad loans, Subramanian raised a Chinese example from the 2000s, when asset management companies were set up for each of the four largest state-owned commercial banks in an effort to strip away nonperforming loans. After clearing their balance sheets, all four banks, starting with China Construction Bank, were deemed to be resilient enough to list their shares, and eventually, some of the asset management companies were also able to go public.

This option seems open to India, but as Subramanian confesses, bailing out so-called bad banks requires taxpayer money and "that is very difficult for any democratic political system."

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