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How Indian Profitability Has Outperformed China’s

Oct. 29 – Michael Cembalest, chief investment officer at J.P. Morgan Private Banking, has placed his clients’ trust firmly on Indian equities and not Chinese.

In his well-read “Eye on the Market” newsletter, sent to the bank’s high net worth individuals, he noted that since China began its market reforms, India has in fact well outperformed China. So far this year, India’s equity market has provided investors with a return of 22 percent while Shenzhen, South China’s bourse in the booming city next to Hong Kong, has actually shrunk by 3 percent.

Over the past 10 years, as we reported last week, India’s Mumbai Sensex has risen 545.2 percent compared to a rise of just 151.3 percent on China’s Shanghai Composite.

Of the 13 managers on Cembalest’s platform who invest in emerging or Asian equities, 10 are overweight on India, a winning strategy this year, he says, given India’s out performance versus most developed and developing equity markets.

In his newsletter this week, Cembalest outlines the reasons:

India provides better corporate profitability
Profit margins compare favorably with other developed and developing countries. Companies in India are more exposed to market forces than in China, which may explain the superior margin results.

India’s equity capital markets are more developed than China
India ranks in the top 10 globally in terms of equity market issuance, with three times the number of public companies as in China. There is greater exposure to the private sector as 75 percent of the investable market cap in India is made up of privately run companies, compared to 18 percent in China.

In short, Cembalest is saying that Chinese companies are “protected by the state” and that the implied lack of market forces create a situation where both state interference and a lack of competition are in fact making Chinese companies less profitable and entrepreneurial than Indian ones.

There is also a difference in funding – 90 percent of available bank funding in China goes to state-owned enterprises, while in India that 90 percent goes to privately held businesses. It makes it far harder for Chinese companies to compete at an executive level with their Indian counterparts, even with the benefit of state funding and involvement. Simply put, Indian businessmen are more capable than Chinese businessmen in making money, and being able to share that through dividends.

While it remains harder to operate in India than China at present, the country is very much on an upward trajectory, and the results speak for themselves. China’s massive state involvement in its own stock markets is hindering the development and profitability of their businesses. When India really starts to kick in with its tax reforms next year, the gap between Indian profitability and China’s in their respective stock market performances and funds may grow even wider.

Related Reading
India the Better, Newer China for IPOs
Indian Equities One of the Best in Asia
Mumbai Stock Exchange Outperforms Shanghai
Sensex Booming as 50% of Companies Generate Over 100% Returns in Six Months

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10 Responses to How Indian Profitability Has Outperformed China’s

  1. Samind says:

    This brings up a question about China’s internal finances. Whats the actual fiscal deficit? How do these lower margins alter the costs in the economy and wages and prices? Given the fact that China has greater exposure to the external world, what will happen when they make internal structural changes.

    India on the other hand went through these changes over the last three decades.My understanding says that we will see a lot of sectoral volatility as changes impact a certain sector each year..but overall relative stability

  2. Chris Devonshire-Ellis says:

    I’m not an economist Samind, but you raise an interesting point – part of which is that China has USD868billion of US Treasury bonds, and is limited in what it can do with them. In terms of fiscal deficit, China is expected to record a deficit of USD160billion for this year. Then we have the currency issue and the value of the RMB.

    Wen is right when he says that alterations in the currency will impact on Chinese workers, see closure of factories, create social unrest in China and make Chinese products more expensive. But frankly, I see that as his political problem and not actually a financial one. It’s hard for global readers – and the average US businessman to take when Forbes just announces 49 new Chinese billionairies have been created, then Wen says raising the value of the RMB will put Chinese workers out of a job. You can’t have your cake and eat it. And that imbalance is Wen’s problem.

    Consequently, the currency issue is starting to look more like a Chinese political matter more than a financial one, and the welfare of China’s workers are quite frankly the concern of the Chinese government to look after and not that of Capitol Hill.

    What will happen? It’s still the US running the global economy, and it’ll be interesting to see what will happen if China for a change has to start to deal with unemployment issues. I think everyone else has had enough of China creating billionaires then moaning about the welfare of its workers. The chickens are coming home to roost for China, and you’re also right – none of these issues are problems that India is having to face. Thanks – Chris

  3. Deek says:

    I hope that China does not have to face these problems in the next few years. If these problems are imminent, then maybe 10-15 years from now.

    Reasons:

    1. World can not afford to have an unstable China.

    2. World economy can not afford it.

    3. Signs of internal social tension would encourage party leaders to divert the attention to outside issues. That includes border tensions with its neighbors. Not a welcoming sign.

  4. Chris Devonshire-Ellis says:

    Thanks Deek.

    I think the phrase “Shanghai as an international financial centre” – when you actually compare it with one that is (in this case, Mumbai) is indicative of the overreaching hype that the Chinese themselves put about, and the extent that much of the West believes or buys into that.

    I think China has created a “hype bubble” and is starting to believe in some of it’s own propaganda. That’s illusionary and is not going to end well. I’d prefer to see more pragmatism than 49 new US dollar billionaires being created, billions spent on Expo and the Asian Games and so on. It’s unsustainable and very unhealthy.

    India, in contrast, is quite the opposite, and the figures in terms of stock performances do not lie.
    Thanks – Chris

  5. Deek says:

    Chris:

    Came across this document:

    http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000192108.pdf

    Its a very good comparative study of India vs China (pictorial representation) till 2003-2004.

    My belief is that India is following the same trajectory as China but with a timelag of 8-10 years.

    For example: as per the chart, China’s GDP moved from $700 bill in 1996 to $1.6 trill in 2003.

    Comparatively, India’s GDP was $700 bill in 2003 and is around $1.5 trill in 2010. Thats almost same as China’s growth with a time lag of 7-8 years.

    I believe China did Infrastructure investment during 90s. And if media is right..then India plans to invest around $1.5 trillion (with T) in the next 5 year plan.

    Request: Will it be possible for you (and your team) to put the comparative charts till 2010? That would be a good indicator of how the countries are performing (with time lag).

  6. Chris Devonshire-Ellis says:

    @Deek, yes you’re right, the trajectory is the same. Three years back I was at a meeting with then Indian Minister of Commerce Kamal Nath and then Chinese Minister of Commerce Bo Xilai. Nath was complaining about Indian democracy and how China had been able to just move ahead and how difficult it was sometimes to get the infrastructure in place, but Bo said it had been the same for China, and that “it would happen” once economic reforms kicked in. That has now happened, and India’s growth curve now is the same as China’s has been for the past ten years. It will also accelerate, although China’s will now slow. The next decade of growth – and the main one fuelling the global economy – will come from India.

    I’ll see what I can do to dig out a graph, but it’s probably not really necessary as we know the situation anyway – and you get to discuss it here for free.
    Thanks – Chris

  7. Deek says:

    Very good article:

    http://www.foreignpolicy.com/articles/2010/01/04/123000000000000

    Even if the population of China will be aging, the per capita income will still be less. What this means is that there will be room to grow. Currently, all western economies + Japan have per capita income of $28k – $38k. This will rise to a median $50 – $70k by 2040. China will continue to grow 9-10% till its per capita income rises to around that level. (All new economies: South Korea, Japan, Taiwan, Hong Kong, Singapore have grown like that). Therefore even $123 tr number looks small to me.

    Important point for India: Next 5-10 years are very very crucial. We are at the cusp where China was 8 years ago. Since 2002, China has grown almost 15% per year. I can say, 3%-4% is due to its investment in infrastructure. India is planning to invest in infrastructure now. If it can pull off 3%-4% off of that…additional 2% off of labor + tax reforms, and 10% normal growth (as it is now), then we might see next 10 years as ~15%-16% growth for India.

    Fairly optimistic….but doable.

  8. Chris Devonshire-Ellis says:

    @Deek – yes, the FDI global darling is about to switch from being China to being India. Thanks – Chris

  9. The_Observer says:

    Chris,
    While FII money is good for a stock market, I agree that FDI is the key as the latter is more long term investment. However, I expect China however to make her financial markets more friendly over time with the Yuan slowly becoming more tradeable. This would mean that which means that the money can flow both in and out of China and Chinese investors will be able to make oversease investments where the returns may be better and take some pressure off the housing market in China. Also with the increased introduction of financial instruments such as Chinese government bonds and derivatives, the Chinese can be made a more attractive market for foreigners and foreign institutions as well.

  10. Chris Devonshire-Ellis says:

    @Observer – 4-5% appreciation of the RMB over USD in next 12 months. But that doesn’t do the stock markets in China any good, and they remain closed. The issue there tot compete with India’s free exchanges is reform, and that’s not on the agenda short-term. Whatever happened to HSBC’s Shanghai listing? Rather quiet on that subject don’t you think? – Chris

Comments are closed.



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