In a recent debate organized by JP Morgan, Frank Gong, head of China research, Adrian Mowat, chief regional equity strategist, and Arup Raha, head of equity research and strategy for India, sat down to analyze the differences between China and India.
To outsiders it often seems that China gets all the good press and India all the bad. A huge and ramshackle bureaucracy, the caste system, nuclearization, levels of poverty (Indian life expectancy is only 63 compared to China's 70; wages are just $0.16 per hour compared to China's $0.84) that force themselves onto the visitor, and the festering sore of Kashmir have all caused immense 'image' problems for the country.
A research report published alongside the seminar would seem to back this up. In it, Raha wrote that China's forecast GDP growth of 8.6% for 2005 and 7.5% for 2006 is higher India's forecast 6% and 6.5%. He said it has proved a brilliant marketing tool for attracting FDI, running at $54 billion per year compared to a puny $4 billion for India.
China's reform and opening phase started a decade earlier than India's. Consequently, its nominal GDP is already $1.5 trillion compared to India's $619 billion.
Despite this, Mowat declared he was underweight China and preferred India long term. (Although China's A-share market is off limits to foreigners, investors gain exposure through investing in the MSCI China Index, which covers foreign-listed Chinese stocks).
Mowat pointed out that 50% of India's GDP came from the services sector compared to 50% from manufacturing in China. He consequently believes that India's growth is more 'organic and entrepreneurial', compared to China's where FDI has played a crucial role.
Gong countered that FDI was not important in absolute terms in China, given that it only accounted for 8% of total fixed asset investment, but that it has played a role in stimulating the private sector. He estimated that only one third of GDP now comes from state-owned assets, compared to 90% two decades ago.
Raha attributed the rise of a dynamic private sector services industry in India to a poor 'hard infrastructure' environment, which has curtailed the profitable expansion of a manufacturing sector. In addition, he said India has a large English-speaking population (although a literacy rate of only 57% compared to China's 90%) and an excellent university sector facilitating its move into information technology, software development and the outsourcing of back office functions.
This is the mirror image of China, which has a decent and constantly improving hard infrastructure.
Gong commented that China is in the middle of a capital intensive industrialization process, which is enabling the accumulation of wealth. However, he noted that China's infrastructure has a price; namely the immense levels of non-performing loans at China banks, which do not often have the risk assessment skills to make profitable loans.
Mowat argued that Indian companies are more profitable than Chinese companies, showing a return on equity of 20% compared to 16% for Chinese companies, based on figures from the MSCI China Index.
He added that earnings per share (EPS) growth for Chinese companies (negative 13% compound annual growth rate since the index started) is not as good as Indian companies, which have seen an 11% CAGR for EPS.
"Empirical evidence suggests you don't make money from China (Chinese stocks in the China MSCI). In India, you get modest returns, but lower than the US," he noted.
Central to Mowat's view is the dysfunctional state of China's financial markets. Uneconomic lending has caused Chinese companies to benefit from an abundance of cheap capital, helped by China's savings rate of 40% of GDP compared to India's level of around 25%. As a consequence, China's companies have often not made as good use of their capital as companies, which have had a more difficult time accessing it.
Mowat believes that India has a further trump card, namely its privatized agricultural sector. Some 50% of India's land is arable, compared to only 10% of China's, which is also bedeviled by an opaque legal framework relating to who can actually own the land.
Another problem for China, according to the research report, is the looming demographic problem caused by increased wealth and the one child policy. The country's working population is likely to fall to 60% from 70% currently. India's population is growing at 1.7% compared to China's 0.7%. China's pension provisioning is also just 2% of GDP.
A key difference in the two countries is the government the report concluded. In India, government has often been part of the problem. In China, the government has initiated the reform process. But it is India that seems to have thrown up more formidable private sector companies. Most of China's domestic giants are state-owned.
