China and India: Who Is Hot in 2006? What Do Investment Banks Think?
Most investment banks have already released their forecast of GDP growth rates for India and China this year. Consensus sits around 9.2% for China and 7.5% for India. The interesting numbers are the ones that sit far from consensus, because they tell you something about the analyst, the institution, or both.
Deutsche Bank always has no preference. Deutsche’s forecasts — 8.9% for China, 7.4% for India — are almost identical to the Reuters consensus poll. This is the second year in a row that DB research has published numbers indistinguishable from the median. Either their model is the same as everyone else’s model, or their incentives are. Careful readers of the DB weekly note will have spotted the standard caveat: “consistent with market expectations.” That is research-speak for covering both sides.
Citigroup loves Indian foods. Citi’s forecast for India is 8.1%, the highest in the major-IB sample. Last year they were highest too, and the year before. There is a structural reason: Citi has the largest India investment banking pipeline of any foreign bank (Kotak joint venture, plus direct presence since 1902), so bullish calls align with bullish deal flow. That said, the Indian economy has genuinely accelerated since the 2003-04 fiscal year, and the Citi call is not unreasonable. It just happens to be convenient.
Morgan Stanley does not like Asian foods. Stephen Roach has been ringing the alarm on both China and India for going on three years. Morgan Stanley’s 2006 forecasts — 8.2% for China, 6.8% for India — are the lowest among the bulge bracket. Roach’s thesis is structural: overinvestment in China (fixed capital formation over 40% of GDP), overheated property, and eventually a U.S. consumer slowdown that Asia cannot cushion. He missed badly in 2004 and 2005. The question is whether he has the story right and the timing wrong, or simply the story wrong.
Credit Suisse, Goldman Sachs, and BNP Paribas love Chinese foods. Credit Suisse First Boston’s Dong Tao has the highest China number at 10.0%. He was also closest to actual 2005 growth (9.9%), which is why his call gets repeated in the financial press. Goldman’s BRICs team (Jim O’Neill’s shop, building on their 2003 report) sits at 9.5%. BNP Paribas is close behind. All three are bank franchises with growing Greater China businesses and, not coincidentally, the most capable locally-based economists.
The joke about banks liking certain foods is only half a joke. Forecasts reflect where the franchise wants to grow, what the top analyst believes, and how much senior management tolerates dissent from consensus. The genuinely interesting question is not who is right in February but what the distribution of errors looks like in December.
In the meantime, the comparison that matters to readers here is not China vs India as forecast objects but as development models — one state-directed and investment-heavy, the other democratic and service-led. Our notes on why India’s financial system is less solvent than China’s and on who actually has cheap labor argue that the conventional stories about both economies miss a lot. We will return in July to grade these forecasts — see the year-half assessment when it runs.