China and India continue to outshine the world

by Brendan Smith

China and India continue to defy the global recession, and are even using the downturn to improve their trade and investment positions. The New York Times reports that China is profiting from the slowdown by gaining market share from its export competitors. The recession has battered global trade, with export-dependent economies like Japan, China and Germany taking a big hit. Recent evidence indicates that China is recovering more quickly than other countries. It vaulted into the position of world's largest exporter for the first time this year, displacing Germany and causing the U.S. to fall to third place. China also displaced Canada for the first time as the biggest source of imports to the American economy. The Chinese government has worked to vigorously support its exporters, offering tax breaks and low interest loans. China's growing trade surpluses are igniting trade tensions, however, as textile producers and others in both emerging and developed countries feel the pain of low-cost Chinese competition.

India, meanwhile, is benefiting from a surge in foreign investment as the world economy begins to recover and investors look for higher returns than the developed economy "safe havens" can provide. India attracted $15 billion in FDI in the second quarter, its second highest total ever. The Indian stock market is booming, as are sales of autos and low-end apartments. This growth will offset the poor monsoon rains and their impact on Indian agriculture. Inflation, though, is becoming a concern, and the rupee is appreciating, potentially harming Indian competitiveness. And the Indian government still needs to raise investment in infrastructure.

China and India's growth is a bright spot in the world economy for now. If it helps the rest of the world pull out of recession, then the temporary imbalances it is creating may be of fleeting importance. Just watch out for bubbles...