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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China's Woes
But the two most dynamic sectors of the Chinese economy -- foreign-invested manufacturing and private enterprises, which are generally new and small -- are scarcely represented on the Shanghai and Shenzhen stock exchanges. Instead, lumbering state-owned enterprises -- relics from the country's shrinking old economy, not its surging new one -- dominate the exchanges. Many of those companies are headed by bosses who have little idea of how to run investor-owned enterprises. A steady stream of news about accounting fraud, embezzlement and rampant inside trading -- even fabrication of shareholder meetings -- contributed to the collapse of both the Shanghai and Shenzhen exchanges starting in 2001.
Investors have done much better by placing their chips on shares of Hong Kong and Taiwanese companies that benefit from Chinese economic growth. So-called H shares, which are better-quality Chinese-government corporations that trade on the more mature Hong Kong Stock Exchange, have also produced better returns.
Compared with China's young stock markets, the Bombay Stock Exchange is a grizzled veteran. Founded in 1875 under a banyan tree, it is Asia's oldest exchange. In recent years, the world-class National Stock Exchange has upstaged the BSE. Established in Bombay in 1994, the privately owned NSE employs computerized trading and paperless settlement systems. "The NSE is a fantastic exchange," says Ajit Dayal, chief executive officer of Quantum Advisors, a Bombay-based investing firm.
Since April 2003, both exchanges have shot up in nearly straight lines. Why? Foreign investors, attracted by India's 7% annual economic growth and strong gains in corporate profits (30% in 2004 among the 100 biggest Indian companies), have poured money into Indian stocks. "Corporate performance has been phenomenal," says Atul Kumar, of Practical Financial Services, a local brokerage.
With a longer tradition of private enterprise, Indian entrepreneurs tend to focus more on profitability than their Chinese counterparts do. "Indians have a much greater respect for capital," says Samir Mehta, chief investment officer of Hong Kong's Lloyd George Management. Mehta calculates that over a typical business cycle, return on equity (a measure of profitability) for Indian companies averages 18%, compared with just 8% for Chinese companies.
Although the contrasts between China and India are sharp now, they will likely blur over time. China's future lies in private enterprise, and its regime may someday realize that capitalism is not compatible with an absence of freedom. India's government is courting foreign investors and finally privatizing the companies that operate and maintain the nation's infrastructure. The dragon and the elephant are forces that will have to be reckoned with for decades to come.