Mumbai: The current structural shift in China could lead to a secular decline in China’s economic growth rate over several years, said Sanjeev Sanyal, global strategist and managing director at Deutsche Bank in an email interview. 

According to Sanyal, the shift in China could have a significant impact on the world’s investment demand and also flood the world with cheap capital. While the global turbulence may not be pleasant in the short run, India could potentially benefit from a prolonged period of cheap commodities and capital, he said while adding that there is scope for a significant decline in Indian interest rates. 

Edited excerpts:

What is your assessment of the Chinese economy? Are the fears of a steep slowdown there leading to global market volatility?

We are witnessing the stresses caused by the Chinese economy transitioning away from its investment-driven economic model. I have been predicting for the last couple of years that China’s investment rate would decline and that it would flood the world with cheap capital. This is precisely what is now happening. It is important to note that this is not a cyclical downturn but a structural shift that could last many years. Even if the US Fed and other central banks tightened, the global cost of long-term capital may not rise for many years. Essentially, some other country needs to find a way to deploy all this cheap capital in a productive way. Given the problems in Europe, the US is frankly the only country with the capacity to deploy so much capital. India too could absorb some of this capital but is still too small to make a dent.

Is this the “hard landing” in China that many have feared for years? What is the spillover impact for the global economy?

I do not think China will witness the traditional emerging market “hard landing” crisis. It is a creditor country which has huge foreign exchange reserves and a large current account surplus. So, we are more likely going to see a secular decline in China’s economic growth rate over several years. The problem for the rest of us is that China accounts for a quarter of the world’s investment demand and a slowdown has major repercussions for global growth. Given the poor state of its physical infrastructure, the US could potentially absorb a lot of this cheap capital but then we have to be prepared for a return to large global imbalances. The alternative is that we remain trapped in this cycle of low demand and indifferent growth where excess liquidity sloshes around and causes bubbles.

What is behind the currency market volatility? Is it the devaluation in the yuan?

We do not think that the Chinese authorities are trying to engineer a large devaluation of the yuan. The recent move merely provided some flexibility and let off some steam. Competitive devaluation can help a small exporter gain market share but a dominant exporter like China cannot expect to gain from this strategy. The real issue for China is to smoothen the transition away from a growth model where it saves and invests half its economy. The crux of the matter is that as a $11 trillion economy, it is struggling to efficiently allocate $5.5 trillion of capital every year. The exchange rate is just a symptom.

What is the economic outlook for India and do you see a steady flow of foreign portfolio flows into India?

Global turbulence may not be pleasant in the short run, but India could potentially benefit from a prolonged period of cheap commodities and capital. However, it needs to accelerate economic reforms in order to take advantage of this situation. In particular, it needs to structurally reduce the domestic cost of capital and fix the banking system’s ability to fund large-scale investment. Given the easy availability of global capital, India could easily become a major destination for both foreign direct and portfolio investment.

Do you expect further monetary easing in India?

As I have already argued, global capital is likely to remain cheap for a prolonged period. At the same time, domestic inflation remains weak except for some food items. Therefore, I feel that there is scope for very significant declines in Indian interest rates. I do not think supply shocks to specific food items like onions should derail a systematic lowering of the cost of capital. Without such a decline in interest rates, the investment cycle will not revive. Of course, rate cuts are not the only factor holding back investment—so other reforms are also needed for the virtuous cycle to be set in motion.