India Vs China

India vs. China: Who Has the Edge? by Jeremy Siegel, Ph.D. Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story Very Good (26 Ratings) 3.30769/5 Posted on Thursday, January 26, 2006, 12:00AM China and India are likely to be the dominant economic powers by the middle of this century but in many respects they are remarkably different. Here and in my next column I will analyze the prospects for economic growth and investment in these two emerging giants based in part on a two-week tour of India I just completed and a visit to China eighteen months earlier. First Impressions Can Be Deceiving The contrast between your first impression of China and India could scarcely be more extreme. You arrive at China's financial capital, Shanghai's new Pudong International Airport, and walk through spacious, clean corridors to the world's fastest train, the Maglev. Your 30 km (18.6 miles) trip takes only eight minutes on this train that floats magnetically above the tracks and reaches speeds of 430 kph (267 miles per hour). From the Longyang Road Metro Station at the outskirts of the city, an air-conditioned taxi takes you to the Grand Hyatt Hotel. As you exit the car you marvel at the other towering skyscrapers that surround the world's highest hotel, located on the 53rd to 87th floors of the Jin Mao Tower. Contrast that with a trip to Mumbai, the financial capital of India. You arrive at the decrepit Mumbai International Airport, fight your way through crowds of beggars and unsolicited "helpers" before finding a taxi that takes to you your hotel at the southern edge of Mumbai. Although the trip is only 20 km (12.4 miles), the ride may take 90 minutes or more. There is no direct route as the driver wends his way through side streets trying to find the least crowded route. Abject poverty lines the road. Millions have flocked to this city seeking employment, many with only tents or cardboard walls as housing. No sanitation facilities are to be seen. When the traffic stops, young children and women holding babies approach your car, tapping on the windows, begging for a few rupees. As you progress to the southern end of the city, more substantial buildings come into view. Yet the vast majority of the structures, especially the rental units, are poorly constructed and dirty from the daily assault of polluted air. Most of the architecture of note in Mumbai was built before the First World War, primarily by the British. You finally arrive at your hotel, The Taj Palace on the Arabian Sea, built in 1903. From these two realities one might wonder why anyone would ever consider investing in India over China. Ranking the two countries on infrastructure - roads, airports, and new buildings, China looks like a ten and India hovers close to zero. Winds are Changing But India is changing, and changing rapidly. The Mumbai Stock Exchange's Index of 30 blue chip companies has more than tripled in the last 2½ years, far outpacing the China's stock returns. And although China's stupendous economic growth rate still surpasses India's, India has now reached the 6% plus rate of GDP growth that marks the emergence of a developing country. What has caused this new look at India? Underneath the surface, India's ledger is lined with pluses that compensate for its woeful exterior. Language, Government and Freedom of the Press In my last column I described the ideal growth environment: free access to information and the freedom to act on this information in a climate that respects wealth creation. Although I in no way condone the British occupation and control of India for several centuries until 1947, three British legacies -- the English language, Democracy, and Freedom of the Press -- benefit many Indians today. The fact that the educated classes all know English gives Indians a comparative advantage in the growing informational sciences and services, while the Chinese advantage still resides in manufacturing. The world's ¬lingua franca, especially in the business and scientific world, is English and that unquestionably gives a leg up to those who know it. Our guide in Jodhpur said that there are two things that he wants his son to learn in school: English and computers. That knowledge, he said, opened up the opportunities for his people. It surprised me that the English language is not taught to many Indians below the top echelon. As you travel from the big cities to countryside, the signs change from predominantly English to almost entirely Hindi. And Hindi still remains the language most Indians speak to natives even if they know English. The ability to speak Hindi may therefore be essential for foreigners who wish to work in India. Indians were proud when President Bush recently added Hindi as a "world language" that Americans (who woefully lack foreign language skills), should learn if they wish to succeed in global markets. Government Eighteen months ago, when I offered an excited view of China's commercial future, doubters frequently asked: "How is this possible under an avowedly 'communist' government." I believe China will evolve into a more democratic political system as it pulls itself out of poverty and feels the pressure of a growing middle class. Although this political evolution is likely, it is by no means a sure thing. Yet for India a democracy already exists, and it has withstood many crises. Furthermore India enjoys an independent judiciary, a critical adjunct to a democratic system. Democracy is the best system in which power can evolve from the private sector, not from dictates of the government. As far as the politics are concerned, there are no reservations about India. Rule of Law and Meritocracy It is well known that the Chinese are master copiers, and openly sell merchandise sporting pirated designer labels or hawk intellectual property that is easily downloaded in our digital world. Although this also exists in India, it does so to a far lesser extent. Private enterprise, private property and the rule of law has been the norm in India since the British occupation. In contrast, until recently, the Chinese government owned and controlled everything. It surprises many that Lakshmi Mittal, an Indian-born steel magnate, is the 3rd richest man in the world after Bill Gates and Warren Buffett. In fact, in Forbes' latest list of the world's wealthiest people, 12 Indians made the list and only two Chinese. And there is a growing consensus in India that this wealth creation can help everybody rise, not just those at the top. Education India is built on a meritocracy where performance on exams dictates jobs and admission to the top-ranked schools. At the top, India's education system is as good as any, and the Indian Institute of Technology (IIT) rivals MIT as the world's producer of top scientists. Furthermore the Indian Institute of Management recently had 200,000 applications for only 250 seats at its top Ahmedabad campus, a ratio that puts the Ivy League' selectivity to shame. Although India does have an "affirmative action" program for those in the lowest castes, the private sector is not subject to these quotas and therefore is free to hire "the best and the brightest." There's no doubt that China is also developing top schools, both in science and in business. The latter is particularly important to China since the Communist system is filled with managers of state-owned enterprises that are woefully inadequate in a private-sector economy. India is ahead of China in this area. Indian education at the lower levels is not nearly as good as at the top. In fact, several experts I talked to put "education" above "infrastructure" and India's number one priority. Nevertheless, the excellence of education at the top has given Indians a great deal of pride in their ability to achieve world-class excellence, and it has been a strong democratizing influence in a society that has been mired in a rigidly hierarchical caste system. Where's the Money? India lags in the hard infrastructure of roads, airports, and buildings, but leads in the "soft" infrastructure of democratic institutions, free press, and an independent judiciary. In the next column I will examine other aspects of business China and India: the networking relationships in Chinese business, the banking sector, demography, and business confidence. Then I will answer the question: "Where are the best opportunities today: India or China?"

India vs. China: Where to Invest? by Jeremy Siegel, Ph.D. Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story Very Good (6 Ratings) 3.666666/5 Posted on Thursday, February 9, 2006, 12:00AM Leaving Zurich's international airport on the way for the World Economic Forum, visitors confront a huge billboard declaring: "India: The Fastest Growing Free Market Democracy." India was a key sponsor of the 2006 Davos Forum, and its direct jab at China, witnessed in prime time by the world's elite, signals just how fierce the competition for the world's investment capital has become. India's bragging rights were inconceivable just a few years ago. As recently as June, 2003, The Economist magazine ran a cover story "India v China: A Tiger, Falling behind a Dragon." In that article, the magazine indicated that in 1980, India's GDP was greater than China's and its per capita income was some 60% higher. Yet by 2003 the situation reversed, as China's economy soared ahead of India and sported per capita income some 50% higher. But in recent years India's economy is rising again and the Tiger is making a run at the Dragon. Investor Confidence The sudden interest in India has boosted the country's self-confidence. Grant Thornton, a leading international audit and consulting firm, carries out a survey of business confidence of more than 7000 owners of medium-sized businesses from 30 countries. Surprisingly, India ranks number one, ahead of the G8 economies, China, and Europe's "Celtic Tiger," Ireland. As I reported in my last column, India lags China in the hard infrastructure of roads, airports, and real estate, but it leads in the "soft" infrastructure of democratic institutions, free press, and an independent judiciary. What other factors favor India? Banking and Finance India's long experience with a free market enabled it to gain significant experience in lending and raising capital. This is not the case in China. Until recently China's banks were in business to funnel loans to woeful state-run enterprises. There were no incentives for these loans to be repaid, and now banks are crippled with an estimated $213 billion of non-performing loans. In contrast, India's major banks are thriving and ICICI Bank, India's second largest, is considered one of the best run in Asia. More than 6,000 firms are listed on the Bombay Stock Exchange, far outnumbering the number in China and more than double the number on listed on our New York Exchange. Furthermore, investors in China's stock markets in Shanghai and Shenzhen have performed miserably over the past decade as overpriced stocks flooded the markets. In contrast, Bombay's stock market has been booming. Business Relationships Trust is certainly an important component of any business relationship. But one aspect of Chinese culture that disturbs me is called guanxi, a network of business and social relationships among various parties who are expected to exchange favors regularly and voluntarily. Although it is wrong to interpret this practice as "bribery," since these exchanges need not involve money, I worry that these networks can be used to shut out those that don't "fit into" an approved Chinese social circle. Guanxi, when combined with the corruption that permeates the Chinese economy, make a truly competitive economy difficult, if not impossible to achieve. For India, these social networks and corruption are less of a problem. To be sure, dishonesty still exists in government service, but high level corruption is being vigorously rooted out by a free press that is absent in China. Perhaps the greatest strength of a free market economy is its openness to do business with anyone who has the qualifications and desire to do a job, regardless of ethnic or social backgrounds. America is so attractive to so many immigrants who have been shut out of opportunities in their own homelands because of our openness. Guanxi combined with the uncertain new laws defining private property and business contracts in a still-Communist China should be a source of concern to investors. Demography Perhaps the most positive aspect of India's future is its demography: India is a very young country, while China, because of its one-child policy, is rapidly aging. According to the UN demographic Commission, by the middle of this century the most densely populated age group in India will be those aged 40 to 50, while in China it will be those aged 55 to 65. This means China will soon start to suffer the same problems as Japan, Western Europe and the United States: an excessive number of retirees relative to the working population. The young have the flexibility to adapt, absorb, conceptualize, and innovate. This is the key ingredient of technological and economic progress. China has a large supply of new workers for private enterprises, but these workers are leaving state-owned enterprises and are older and are not as adaptable as the young labor market in India. The late management guru, Peter Drucker, said that demography is the "future that happened." Population trends are not easily reversible, and here the advantage goes to India. India or China? With all these points favoring India, the answer to the question, "Where should your money go?" may seem like a forgone conclusion: India has the best prospects for investors. But, as I explain in my book, The Future for Investors, there are two aspects to every investor decision. First you must size up the prospects for the firm, the sector, or the country. On this score, India scores some high marks. But you must also evaluate the price that you are paying for these prospects. India's investment climate looks ripe for growth, but the markets have recognized this and have pushed stock prices upward. The Sensex 30, India's best-known stock market index and analogous to our Dow-Jones Industrial Index, was only 3300 in December 2002 but on February 6, 2006, the index broke through 10,000 for the first time. A Question of Value The price-to-earnings ratio on this index has reached 21, while Chinese stocks on the Hong Kong Stock Exchange are selling for only 15 times earnings. Goldman Sachs Asia Pacific Strategy recently indicated that it thinks valuation has turned the tide toward China. In a December review of the Asian markets Goldman stated, "We remain bullish long term [on India], but are market weight given the stretched valuations [and other factors]." In contrast Goldman's Asia team remains overweight in Chinese equities due to the cheaper valuations. Both India and China have enormous promise and I would certainly own stocks from each of these countries in a long-run portfolio. But India's edge is no secret and future returns will not match the stellar gains of the last three years. And remember, all the developing markets, no matter how promising, contain considerable risk. In a later column I will advise readers on how to build a global portfolio that will balance growth prospects with these risks.
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