China, India: Richer or Poorer?

Read this excerpt from the September Asian-Pacific Financial Forecast to see where China and India are headed: for “wealth creation” or “wealth destruction.”

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The stock market is more than a measure of companies’ valuations. It’s also a measure of social mood – and of the broad trends that wash through society.

The unique mindsets, market and economic activities during the past decade have turned China and India into very different countries.

Will these trends continue?

We’d like to invite you to read this excerpt from our September Asian-Pacific Financial Forecast. In it, Editor Mark Galasiewski shows you where China and India are headed next in their wave patterns – and what that will mean for business and life in general.

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See for yourself in this excerpt from our Asian-Pacific Financial Forecast and Global Market Perspective, from editor Mark Galasiewski:

Special Section

How Waves of Social Mood Create and Destroy Wealth: Examples from China and India

Socionomics proposes that the waves of positive social mood that create large bull markets also engender a desire for achievement, which leads to laissez-faire policies (meaning less government interference), higher economic inequality and wealth creation; similarly, that the waves of negative social mood that create large bear markets also engender a resentment of achievement, which leads to dirigiste policies (meaning more government interference), lower economic inequality and wealth destruction. In this special section, we will show that the major political and economic shifts that China and India have experienced in recent decades are consistent with the socionomic hypothesis. We will also discuss how recent policy changes in China and India support our long-term wave counts for their stock markets.

China

The first chart updates our long-term wave count for the Shanghai Composite. It includes the history-based, proposed waves in the years between the start of the Cultural Revolution in 1966 and the launching of stock market trading in China in 1990. To develop the count, we considered the major turns in Hong Kong’s Hang Seng Index, which hit its all-time low in 1967, and other global indexes as well as key events in Chinese history. Although the Chinese Communist Revolution of 1946-1949 is not shown on the chart, we believe that, like the Cultural Revolution, it occurred during a large bear market, as many global stock markets ended large bear markets in the late 1940s.

The stated purpose of both the Chinese Communist Revolution and the Cultural Revolution—similar to most political revolutions—was to correct the excess accumulation of power and wealth by privileged groups and to redistribute resources and opportunity more equitably to the majority. The Chinese Communist Revolution dismantled much of the remnants of Chinese feudal society. The Cultural Revolution purported to continue the job, targeting landowners, rich farmers, intellectuals, rightists and other enemies of the state. Both revolutions were fomented by negative social mood.

As the uptrend began to gain steam in the late 1970s, China began opening up the economy and implementing laissez-faire policies. Paramount leader Deng Xiaoping instructed the government to “let some people get rich first.” Private enterprise boomed and the number of state-owned enterprises fell from about 262,000 in 1997 to a low of about 110,000 in 2008.

During the bear market from 2007 in the Shanghai Composite, the pendulum has swung back in favor of government intervention and dirigiste policies. After Xi Jinping won a power struggle within the Communist Party and purged high-ranking rivals in 2012, he became President and initiated a broad anti-corruption campaign against “tigers and flies,” meaning corrupt officials at all levels—an early indication of the backlash-to-come against wealth and privilege. By 2016, the number of state-owned enterprises had risen back to about 173,000.

In recent years, Chinese state media have been calling for a “third wealth redistribution.” The regulatory crackdown the government has conducted against the nation’s most successful companies over the past year shows that the dirigiste voices again have the upper hand.

The crackdown began in August 2020 with real estate, the asset class most widely held among the wealthy. Regulators imposed restrictions on property developers to significantly reduce leverage in real estate, in line with President Xi’s pronouncement in 2017 that houses are “for living in, not for speculation.” The government then crippled the lending activities of fintech behemoth Ant Group, because it deemed the company’s control over consumer debt and data to be a systemic risk; it also slapped Ant’s affiliate Alibaba with a record antitrust fine. The government has since expanded the crackdown to include delivery, ride-hailing, logistics, gaming, education, pharmacy, liquor and cosmetics firms, most of which are publicly listed. Since a peak in February this year, the biggest tech stocks alone have lost more than one trillion dollars in market capitalization, significantly denting the fortunes of China’s ultrawealthy. (See also our discussion of China’s largest listed company, Tencent Holdings, in the China section below.)

The crackdown against capitalist excesses is occurring now because a large swath of Chinese society has in many ways reached a breaking point during the bear market—and the Communist Party deems that discontent to be an existential threat to its rule. Housing and education costs, for example, now make up such a large percentage of the average family budget that many young people cannot afford to have children; some have instead adopted a minimalist lifestyle known as lying flat. Therefore, the goal of the campaign is not only to redistribute wealth but also to change attitudes among the young. That’s why regulators have also expanded the crackdown to include ultrawealthy celebrities and the popular entertainment industry, which they claim have “instill[ed] incorrect values” in the younger population. (South China Morning Post, 8/28/21)

One online commentator wrote a satirical portrait of the government’s new ideal for Chinese youth, which was widely shared before it was censored. Here is an excerpt:

The socialist successor of the new era does not attend after-school tutoring, does not play video games, does not chase celebrities. They finish all their homework at school, read President Xi’s selected works for one hour every day, go to sleep before 10 p.m., take the initiative to do chores, urge their parents to have more children and help look after them. (Bloomberg, 8/18/20)

In that sense, the government’s crackdown on successful companies has echoes of the Cultural Revolution, which nominally sought to redistribute wealth while instilling socialist ideals in young people.

Because China has developed into a largely modern, industrialized economy over the past 40 years, it seems unlikely that the nation will repeat the violence of the Cultural Revolution. For example, no Red Guards will be enlisted to denounce or murder their teachers this time—although many children will soon lose their private tutors due to the recent bans on for-profit education.

But the same themes of wealth redistribution and so-called youth rectification should continue to play out in some form. For example, a consensus is growing in favor of imposing property taxes, which had long been a taboo subject while home sales were booming, and of increasing pension, healthcare and other benefits. It’s even possible to imagine the government requiring military service or other social service of young people at a certain age, which Singapore, Taiwan and South Korea already do—a sort of modern version of sending privileged urban youth down to the countryside for communal re-education among the villagers.

With the bear market in the Shanghai Composite far from over, China’s third wealth-redistribution trend will probably continue to develop in coming years—until the consensus again shifts in favor of allowing more inequality during the next secular bull market.

India

When India achieved independence from Britain in 1947, it instituted centralized economic planning. The choice of dirigiste policies was consistent with the socionomic hypothesis, given that equity prices made no net progress from 1920 to 1977, just before the start of the Sensex in 1979, according to a long-term index of Indian stocks. Within that long net sideways trend, India’s Independence occurred right in the middle of a 61% decline from July 1946 to June 1949.

Given the negative mood of the time, India’s new political leaders built a highly protectionist economic system run by bureaucrats and closed to the outside world. It would become known as the License Raj, a system in which up to 80 government agencies had to be satisfied before private companies could produce anything, and, even if a license was permitted, the government would still regulate production.

As the bull market of the 1980s took off, successive governments began to liberalize the economy, but those efforts were mainly limited to the tech sector. It would take a crisis to really shake up the system: In the wake of the downward correction in 1991, India faced a balance of payments crisis, with the rupee sliding almost 30% against the U.S. dollar that year.

Amid the crisis and after, the government accelerated the dismantling of the License Raj, established a system to encourage foreign investment, and began the process of privatizing public companies through stock market floatations. Laissez-faire policies were now on the ascendant.

The result was a stunning improvement in India’s fundamentals, which became especially evident toward the end of the bullish move up from 2003 to 2008. For example, in its October 2007 Policy Brief, the Organization for Economic Co-operation and Development noted that in India “annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently,” and that “increased economic growth has helped reduce poverty, which has begun to fall in absolute terms.” The organization reserved its highest praise for “infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, [where] the private sector has proven to be extremely effective and growth has been phenomenal.”

That success appeared to stall during the years after the global financial crisis, but by the 2014 general elections, it was clear that a political consensus had been reached in favor of a reduced economic role for the state, as the leaders of the three leading political parties all appeared to agree on the need for economic liberalization. Noting the consensus, the Economist wondered on March 1, 2014, “is the ghost of Margaret Thatcher lurking in Indian politics?”

In the end, Indian voters chose the most pro-business of the three, Narendra Modi, who has accelerated the liberalization effort as the wave III bull market has gotten well underway.

In the past five years, the government has simplified the process of declaring insolvency and bankruptcy; simplified the tax system for goods and services; lowered corporate taxes; passed wrenching reforms to liberalize the farm sector; shortlisted four state banks for privatization; and, most recently, in August 2021, announced that $81 billion of state assets would be monetized over four years. The overall impression is that the government is becoming as serious about reform now in the latter stages of wave III up as it was in the latter stages of the bullish wave up in the early 1990s.

As in the early 1990s, the government is getting out of the economy because it has no other choice. That’s because state subsidies and have become an enormous burden, and society needs to create millions of new jobs each year for the growing populace. But the desperation driving the economic liberalization will eventually create growth and wealth—just as China experienced during its bull market that ended in 2007.

In fact, the recent privatization push in India strikes us as being similar to China’s efforts in the 1990s to reduce the role that state-owned enterprises played in the economy in the middle of the bullish wave up in the Shanghai Composite. We are maintaining our wave forecast for Indian stocks for now, but the relatively small decline in 2020 and the recent laissez-faire shift in India may in fact support the alternate count, which suggests that the Sensex could now be advancing.

Conclusion

In line with our socionomic observations about positive and negative social mood trends, the recent policy changes in China and India support our wave counts for their respective stock markets. Mired in the Shanghai Composite’s bear market, China is attacking its most successful companies and individuals—such as corrupt officials, successful entrepreneurs and ultrawealthy celebrities—as part of a campaign to redistribute the enormous wealth these people built up over prior decades. In contrast, as the Nifty 50 Index has hit record highs in recent years, India has taken steps to reduce the state’s role in the economy to create wealth and increase employment.

Furthermore, our wave counts indicate that the dominant mood trends in each nation should last for at least several more years, implying continued wealth destruction in China and continued wealth creation in India.


Mark Galasiewski

Editor, Asian-Pacific Financial Forecast

Mark Galasiewski (gala-SHEV-ski) lived in Japan for most of the 1990s. A graduate of Middlebury College (Vermont, USA) in East Asian Studies, he is fluent in Japanese and conversant in Mandarin Chinese. In his monthly commentaries, Mark not only discovers opportunities in Asian-Pacific markets, but also shows how cultural and political events relate to financial trends in the region. He has traveled to many of the countries he writes about, including Japan, China, South Korea, Hong Kong, Singapore, Thailand, Cambodia, Egypt and Jordan.

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