Markets
What's Driving the Asian Giants?
For China, it's manufacturing. For India, it's services. For you, it means profits.
By Andrew Tanzer, Senior Associate Editor
From Kiplinger's Personal Finance magazine, December 19, 2005
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Market results
Yet for all of China's apparent strengths, India's stock market has performed far better. Lifted by a tsunami of foreign money, the Bombay index has surged 170% over the past 30 months. The Shanghai Stock Exchange hit an eight-year low in July and is off 51% from its June 2001 high -- a curious result amid a booming economy.
Since the still-nominally Communist nation opened for business in 1978, China's gross domestic product has expanded by a staggering 9% a year, and international trade has grown at an annual rate of 15%. But foreign companies, not Chinese-listed enterprises, dominate exports.
India embarked on its economic reform in 1991, 13 years after China. China's reform has been more consistent and better managed; in India, it's two steps forward, one step back. The Indian government seems particularly hapless when it comes to providing infrastructure -- vital for moving manufactured goods to market in today's just-in-time world. India suffers from severe deficiencies in power supply, roads, railways, ports, airports and sewage facilities. Morgan Stanley estimates that China spends eight times more on infrastructure than does India.
Granted, it's easier building infrastructure in a one-party state like China than in India with its pluralistic, cumbersome democracy. If Shanghai authorities want your land to construct an overpass, they'll take it -- and pronto.
It's a different story, to put it mildly, in India. Plans to build a new road can stir up a cyclone of lawsuits brought by dispossessed landowners. India cries out for more power generation, yet politicians still lavish free power on farmers. "Any politician who wants rural votes promises free power to farmers," says S. Natraj, head of research at Equitymaster, a securities research house in Bombay.
But India excels in services, an area in which brainpower and fluency in English are more important than heavy capital spending. The strict labor laws, high taxes and bureaucratic red tape that strangle manufacturing barely touch India's new service industries.
India's software and back-office outsourcing businesses are booming, driven almost entirely by the needs of overseas customers, such as General Electric and Citigroup. Indians work from remote locations on everything from processing insurance claims and tax returns to updating Web sites and conducting financial analyses.
The burgeoning service sector is fueling robust job growth and the rapid expansion of the Indian middle class. "Ten years ago, when youngsters graduated from college, it was hard to get a job," recalls Keki Mistry, managing director of Bombay's HDFC, the country's largest mortgage lender. "Now they get two or three job offers."
Still, growth is growth, and it's not intuitively obvious why the Indian and Chinese stock markets should be behaving so differently.
A closer look at the dynamics of China's growth and its stock markets explains much of the divergence. Direct investment from foreign sources played a crucial role in creating the Chinese export monster. Encouraged by tax incentives and government efforts to build modern infrastructure, foreigners have invested about $500 billion in China over the past decade; factories built with foreign investments account for more than half of China's exports.
