China vs. India: "The Hare vs. the Tortoise"
By Nicholas Vardy
The Global Guru
When you compare Asia's two rising BRIC giants, China and India, China comes out on top by virtually every measure. After all, China has been growing at close to 9% over the past 30 years and, by some measures, has just surpassed Japan as the world's second-largest economy. Meanwhile, India threw off the shackles of its Hindu rates of growth comparatively recently in the 1990s, and has yet to break into the ranks of the world's top 10 economies. China's per capita income is about six times that of India - $1,016 compared to $6,100 in China.
Most investors remain convinced that China will continue to outperform India during the coming decades. After all, your email inbox is not filled with Indian newsletters touting triple-digit percentage profits from the "Indian miracle." But the terrible performance of the stock market in China this year is forcing investors to take another look at the "China miracle." For all of the attention lavished on Beijing's Olympics and the Shanghai World's Fair, Indian Prime Minister Manmohan Singh still believes that "slow and steady will win the race." Certainly, for investors in the local stock markets, that may turn out to be the case.
Chinese economic development has outpaced India's by just about every measure. The Chinese have built the biggest dams, the longest bridges, fastest-growing cities, as well as their own planes, submarines, ships, magnetic trains and railways. The images of China's shiny new (although sometimes empty) cities and wide freeways contrast sharply with the dilapidated infrastructure of India's New Delhi and Mumbai.
China's fast-acting mandarins implement new policies with seeming omniscience. This includes the biggest economic stimulus in history that has helped jumpstart economic growth in not only China, but also the Asian region and the world. On top of the government's sharp jumps in infrastructure spending, Beijing spurred China's banks to double the amount of new loans they made in 2009 to $1.4 trillion - representing almost 30% of gross domestic product (GDP).
But just more than a year into the fragile global recovery, cracks are appearing in the Chinese wall. Beijing's easy-money policies have fueled a property-price bubble. Selected real estate projects in Shanghai and Beijing have plummeted 30% to 50% in a matter of weeks. The lending explosion in China's banking system - which now boasts four out of the world's top ten banks - has raised questions about loan quality. The Chinese government has conceded that as much as 20% of its banks' loans will turn out to be nonperforming. A more realistic number of 30% of loans turning sour could bankrupt the entire banking system. Even conservative estimates put bad loans at a staggering 8% of GDP - more than double what the savings and loan crisis amounted to in the United States.
Equally importantly, the Great Recession has revealed that that the engine of China's growth during the past 30 years - selling exports to the West - is yesterday's game. Western economies no longer can absorb an endless supply of goods from East Asia. The key question for investors is which countries can make the transition to a post-mercantilist world. For China, that transition will be tough.
The Indian model could hardly be more different. India's democratic system is noisy, slow-moving and chaotic. In the past, India never could compete with China on top-line economic growth. China is slowing its economic growth to about 9%, while India is expected to hit 9.2% in 2010. This may be a watershed year. If Western economies do flirt with a double-dip recession, 2010 may mark the first year that India grows faster than China.
India's economy also is rebounding from the global downturn in better shape than China. Like China, India's government cut interest rates, introduced tax breaks and increased fiscal spending to combat the downturn. But India's government stimulus totaled only 3% of GDP, compared to China's, which hit 6%. This has much to do with the different structures of the economies. Exports represent only 24% of India's GDP, compared with 35% of GDP for China. Consumption accounts for 57% of GDP in India, compared with only 35% in China. As a result, India's domestic economy is much less subject to the whims of U.S. shoppers at Walmart.
And unlike China, India never put its banking sector at risk to save its economy. Whereas Chinese banks couldn't shovel enough money out the door fast enough in 2009, credit growth in India was actually slower in 2009 than in 2008. As a result, there is no sign that the assets of Indian banks were deteriorating. Nor did India's monetary policies send prices of Indian real estate to bubble levels. The bottom line? India's growth of 9.2% in 2010 stands on much firmer ground than China's equally eye-popping growth number of 9%.
China vs. India: "Order vs. Chaos"
Russell Napier of investment bank CLSA has warned investors not to get fooled by China's superficial order and India's apparent chaos. Napier makes a compelling argument for why you are more likely to make money investing in India than China. India has a far more established private-sector financial system. Chinese banks still are acting as the long arm of the Communist Party, funding pet projects and state-owned enterprises. India uses capital much more productively than China. India's driver of economic growth is consumption instead of volatile exports. India has achieved its successes with a market-based exchange rate, while Chinese companies tremble at the prospect of a revalued yuan crushing their razor-thin margins. India even is making progress on infrastructure. The recently opened New Delhi airport is comparable to the modern aviation hubs of Hong Kong, Singapore and Dubai. Equally importantly, it took only 37 months to build - faster than the 45 months China spent to complete the terminal in Beijing that opened in time for the 2008 Olympics.
A handful of Chinese moon shots notwithstanding, the performance of the Chinese stock market has been one of the worst in the world during the past 12 months - and has trailed India's stock market by a substantial margin.
This has left investors scratching their heads. But it turns out that there is little correlation between economic growth rates and stock market returns - especially in markets like China. China's economic model of state-owned enterprises, ultra-cheap exchange rates and a near total dependence on export growth and investment tend to make for lousy investments.
The verdict? Over the next 10 years, look for the Indian stock market to outperform China. At least as far as stock market investors are concerned, look for India's tortoise to over take the Chinese hare.
Editor's Note: Nicholas Vardy is a proven global investor who has daily contact with top investment managers in the heart of London's exclusive hedge fund community. He is the editor of Global Stock Investor, Global Bull Market Alert, and The Global Guru - a free weekly E-newsletter that helps you uncover the world's secret bull markets. To sign up visit www.TheGlobalGuru.com.
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