China gets the attention, but the returns are in India

PHILIP SEGAL

China and India each promise markets of more than a billion people. But somehow. China gets all the attention, even though there’s little evidence that it’s more profitable to invest in Beijing than in Bombay. In fact, investors would be wise to balance their exposure to to these two giants.

Consider: Indian stocks have historically outperformed Chinese ones. That’s partly because the kinds of Chinese companies available to stock-market investors have until recently been restricted to state-owned monsters with boated payrolls and rotten corporate governance.

India has its share of those corporate basket cases too. But since the country has a longer history of capitalism and rules that allow foreign-controlled companies to list on the exchanges there, investors have had better-run companies to choose from.

According to the Standard & Poor’s database of offshore mutual funds, China funds returned 34% over eight years, against a 400 return for India. (Going further back than that, there are too few funds to make meaningful comparisons). While India’s past year has certainly been rotten, the record is clear: for individual 12-month periods going back eight years, Indian funds outperformed funds investing in China in five of them.

How can investors decide which of the two behemoths will produce better returns in the future? One way might be to gauge the performance of direct investments in both countries. It stands to reason that if both places are really on the path of economic reform and increased stockholder-participation direct investment returns ought in some way to mirror returns to stockholders.

For now, China still gets the bulk of favourable publicity. Yet despite all the hype about what a huge market China is, you hardly ever hear about companies actually making a profit there.

“I’ve not seen numbers that I felt comfortable with,” says Joe Massey, who spent 10 years as chief US Trade Representative with China and is now Director of the Center for Asia and the Emerging Economies at the Tuck School of Business at Dartmouth College. “You see very few numbers on how much companies make.”

“China’s still a tough place,” says Kent Kedl, head of Technomic Asia, a market-strategy consulting firm that advises Western companies operating in Asia. “We did research in late 1999 on some European companies. Of 200 companies, something like 94% of them were not seeing a profit. They were hoping by late 2000 or 2001 that 40% of them would reach a breakeven point.”

What statistics there are on direct investment point to a China that is better at burnishing its reputation than generating earnings for foreign companies.

Reinvested earnings in China by US companies came to just $633 million in 1999, according to the US Commerce Department. That’s not much out of $9 billion reinvested throughout the entire Asia-Pacific region, and just a speck among the $7 billion reinvested worldwide. Of course, some companies may be reluctant to talk about their profits in China for fear of being taxed on the proceeds, though that’s a worry in India and in many developing markets.

As bad as things in China seemed, India had an even worse year. With political instability and a flagging reform programme, money reinvested in India was negative $62 million, which means US companies there were taking more money out in earnings than was getting reinvested.

One negative in India has been the experience of US energy company Enron, which has tried for years to nail down a firm contract on power supply from a $2.9 billion reactor it built—India’s largest foreign investment. As local governments change, so do the requirements that Enron take a lower price for its power, amid accusations (denied by Enron) of corruption.

“Enron’s experience has resonated,” says Mr Massey at Dartmouth. “Sure it’s democratic (in India), but seems less stable.” But before writing India off, remember those poor investment numbers were from 1999. Look more closely and the picture changes.

In Beijing, talks to open the country further by getting into the World Trade Organisation have stalled. But China is eager to unload billions of dollars in non-performing loans that its own banks have had trouble collecting onto foreign investors. Sure, bad loans can make you a profit if you buy them cheaply, but China’s primitive commercial court system makes valuing assets and collecting them in the event of bankruptcy very difficult.

In India, on the other hand, foreign companies last week learned they would be allowed to hold 74% in telecom companies, up from the 49% permitted now. That looks great on paper, but bureaucracy in India is legendary (just like in China). The proof will be how effectively businesses can operate.

Bad loans or control of a phone company? Last week, at least, India came out ahead on reform. China may get the good press, but given the stock market advantage of India and the murky investment climate in both countries, a mutual fund holder would be wise to at least balance holdings in China and India, not write one off in favour of the other.