India vs. China: Whose Economy Is Better? (Report from Times)

[ajtr]

So What?s The China Deal with India & Vietnam?​

Jan. 31 – As stories begin to break about concerns over the Chinese economy, and the slowdown that this would invariably bring, what are the potential impacts that a resurgent India and Vietnam markets could instead bring to the table? Our firm, Dezan Shira & Associates, has been operational in each of these markets for some considerable time now. Next year, we will celebrate twenty years of legal and tax advisory services in China, from our ten offices there. In India, it will be five years and five offices, and in Vietnam, four with two offices . These are not small operations, either. In each country we operate in, we have applied for, and been granted, the requisite operational licenses, invested the required registered capital standards, and employ staff managed by a National Country Manager. In China, this is Alberto Vettoretti, in India, Aneet Virk, and in Vietnam, Hoang Thu Huyen.

As far as I am aware, no other practice has either that specific reach or experience, although of course pretenders drop by and comment from time to time as these markets start to look more attractive. However, as we learned a long time ago, when it comes to professional services, there's no substitute for having your own people on the ground, running a business, and dealing with clients as a direct result of possessing that first-hand knowledge. Sub-contracting work to local firms in such countries, as some practices do, is unrepresentative of the actual licensing required and is not enough to delve deeply into the real issues concerning on the ground work. The fact that so many do attempt to comment on these issues without actually having a presence there is therefore a matter of some wry amusement, at least to us. It means that there is a lot of nonsense spoken about markets by people whom neither have the financial commitment to nor regulatory expertise dealing with them.

It's a matter I hope to address in this piece, especially as concerns about a potential China slowdown develop. It's a scenario that is gaining increasing credibility, and something which we have highlighted through a variety of recent articles: "China Bears Gathering As Analysts Question Economy", "China's Dragon Playing With Fire" and "China's Credit Bubble About To Burst" . All involve theories concerning a growing gap between Chinese incomes and the cost of living, struggles with inflation, and an apparent battle of wills between the Central Government and Chinese property speculators. If things do grind to a halt, growth in China will regress, and multinational corporations that have grown accustomed to putting ten percent growth or more on their shareholders balance sheets at the end of each year will be punished. India and Vietnam, not to mention the rest of Asia, seem to offer a potential way out of this. But what are the real deals that these countries offer when held up to China? Let's examine each of these markets in brief:

India
For a long time, the issue with India has always been its infrastructure. Second, endemic corruption and third, bureaucracy. In fact, all of the problems associated with each of these exist. However the key to understanding India lies in the degree of the issue. In terms of infrastructure, it's a no-brainer. India's infrastructure needs, and is getting, a major overhaul. In terms of getting finance into the literally thousands of medium-big ticket projects that are going on, India's Government is offering shares and financing in these projects to foreign investors. Often packaged under the term "Public-Private Partnerships", these spell out how foreign investors can enter into these projects, obtain funding, and participate in the reconstruction of the country. We wrote about this extensively in this issue of India Briefing Magazine. In short, foreign investors involved in infrastructure development—engineers, contractors, architects, materials suppliers and so on—all need to get into the India market much as they did in China. The opportunity is now.

Concerning corruption, in India, it is endemic. However much of the impact on foreign businesses exists with the "baksheesh" request—a small "bribe" more often akin to giving a tip for processing a document. Typically running at just a few hundred rupees (a matter of cents), it is annoying, yet all pervasive. Concerning large-scale corruption, there is of course collusion between government officials and businesses—as occurs in all governments. Yet, India does maintain press freedom, and if caught, such protagonists can expect a literal trial by public fire. By contrast, the Communist Party sweeps much of what goes on in China under the rug. India's bureaucracy is also not as bad as it's painted—we know this first-hand as we run five offices assisting foreign investors in the country. Filings for the establishment of foreign invested offices, factories and so on are a daily occurrence for our firm. Just as one example, compared to China, it takes one step less in India to set up a representative office. The bureaucratic difficulties associated with doing business in India are over-hyped.

India also has a number of other things going for it. Its working population is young and accordingly much less expensive than China, and add-on expenses such as social welfare payments are at just 20 percent of China's levels. India's reforms are also gathering pace—a reduction in both corporate income tax and individual income tax is expected this year—which is a move that will reduce the levels of both from 45 percent down to 30 percent. That makes India highly competitive to China in terms of both labor costs and income tax.

Finally, there's the matter of India's own middle class. India has a huge middle class and a taste for foreign goods. India's population is quickly catching up with China's, and whereas China's myth of a billion consumers has been around for centuries, India's close match to this market size, coupled with an economy that is becoming more open rather than closed, means foreign businesses in India have not just an opportunity to conduct cheap manufacturing, but also sell to the local market. In this regard, as export manufacturing costs make China prohibitive, India is now one of the few countries where both cheap labor and a wealthy consumer class go hand in hand. Our China-India 2011 comparison , which includes labor costs, taxes and so on can be downloaded for free and provides much additional data concerning these perspectives.

Vietnam
Vietnam, meanwhile, is also booming, but for different reasons. Sharing a northern border with the far South-West of China, it offers both a refuge for previously South China-based factories having to cope with rapidly increasing labor costs, as last week's article on Guangdong Province raising its minimum salary level twice in six months ably demonstrates is fairly common. Wages in Vietnam run at a significant discount to China, as do the mandatory welfare payments, making the shifting of labor-intensive industries to the long east coast of Vietnam a more attractive economic proposition. This is in addition to access to a new developing market—that of the ASEAN bloc. Inter-ASEAN trade, now largely duty free, is worth some US$1.5 trillion, with a market of some 580 million people. As neither China nor India are members of ASEAN, moving operations to Vietnam, which is a member, gives a distinct advantage in avoiding duties. The ASEAN bloc consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, and if combined as one nation, it would be the ninth largest in the world. Vietnam, with an improving export driven infrastructure, low wages, and access to the ASEAN free trade market, is quickly emerging as an attractive destination.

Like China, it too has been making use of Free Trade and Industrial Zones to assist with the facilitation of foreign investment into the country, a subject we again discussed in some detail in this issue of Vietnam Briefing Magazine . Vietnam still offers significant tax incentives to do so, something which China largely dropped from its investment agenda a few years back. We also wrote about the feasibility of relocating a factory from South China to Vietnam in this article "From China To Vietnam For Labor Intensive, Export Driven Manufacturing" a piece that compared costs and included the redundancy payments for laying off Chinese workers in the process. Vietnam, it is apparent, is a serious contender for picking up export processing business from China.

Emerging Asia also of course impacts the movement of investment opportunities in the region, especially as far as China is concerned. We have discussed these issues also in some length in our piece "China Near Top For Wage Overheads In Emerging Asia" , in addition to examining some of the other Asian emerging market issues in the articles "Cambodia, Laos & Vietnam – Indochina and China Today" and "ASEAN Summit Seeks Increased Regional Links."

As China looks to experience a period of some decline in growth, both India and Vietnam offer solid opportunities for foreign investors to be able to make that up, as does the ASEAN trading bloc as a whole. Investors requiring more specific assistance or advice may contact our regional partners.

 

[kickok1975]

In the inevitable comparisons that economists and businesspeople make between Asia's two rising giants, China and India, China nearly always comes out on top.

The Chinese economy historically outpaces India's by just about every measure. China's fast-acting government implements new policies with blinding speed, making India's fractured political system appear sluggish and chaotic. Beijing's shiny new airport and wide freeways are models of modern development, contrasting sharply with the sagging infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great Recession, India once again seems to be playing second fiddle. Pundits around the world laud China's leadership for its well-devised economic policies during the crisis, which were so effective in restarting economic growth that they helped lift the entire Asian region out of the downturn.

Now, however, India may finally have one up on its high-octane rival. Though India still can't compete on top-line economic growth — the World Bank projects India's gross domestic product (GDP) will increase 6.4% in 2009, far short of the 8.7% that China announced in mid-January – India's economy looks to be rebounding from the downturn in better shape than China's. India doesn't appear to be facing the same degree of potential dangers and downside risks as China, which means policymakers in New Delhi might have a much easier task in maintaining the economy's momentum than their Chinese counterparts. "The way I see it is that the growth in India is much more sustainable" than the growth in China, says Jim Walker, an economist at Hong Kong–based research firm Asianomics.

India's edge is due to the different stimulus programs adopted by the two countries to support growth during the downturn. China implemented what Walker calls "the biggest stimulus program in global history." On top of government outlays for new infrastructure and tax breaks, Beijing most significantly counted on massive credit growth to spur the economy. The amount of new loans made in 2009 nearly doubled from the year before to $1.4 trillion – representing almost 30% of GDP. The stimulus plan worked wonders, holding up growth even as China's exports dropped 16% in 2009.

But now China is facing the consequences of its largesse. Fears are rising that Beijing's easy-money policies have fueled a potential property-price bubble. According to government data, average real estate prices in Chinese cities jumped 7.8% in December from a year earlier — the fastest increase in 18 months. The credit boom has also sparked worries about the nation's banking system. Many economists expect the large surge in credit to lead to a growing number of nonperforming loans (NPLs). In a November report, UBS economist Wang Tao calculates that if 20% of all new lending in 2009 and 10% of the amount in 2010 goes bad over the next three to five years, the total amount of NPLs from China's stimulus program would reach $400 billion, or roughly 8% of GDP. Though Wang notes that the total is small compared with the level of NPLs that Chinese banks carried in the past, she still calls the sum "staggering." Policymakers in Beijing are clearly concerned. Since December, they have introduced a series of steps to cool down the housing market and restrict access to credit by, for example, reintroducing taxes on certain property transactions and raising the required level of cash that banks have to keep on hand in an effort to reduce new lending.

India, meanwhile, isn't experiencing nearly the same degree of fallout from its recession-fighting methods. The government used the same tools as every other to support growth when the financial crisis hit – cutting interest rates, offering tax breaks and increasing fiscal spending – but the scale was smaller than in China. Goldman Sachs estimates that India's government stimulus will total $36 billion this fiscal year, or only 3% of GDP. By comparison, China's two-year, $585 billion package is roughly twice as large, at about 6% of GDP per year. Most important, India managed to achieve its substantial growth without putting its banking sector at risk. In fact, India's banks have remained quite conservative through the downturn, especially compared with Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008. As a result, economists see continued strength in India's banks. A January report by economic-research outfit Centennial Asia Advisors noted that based on available data, "there was no sign that domestic banks' nonperforming assets were deteriorating materially." Nor do analysts harbor the same concerns that India's monetary policies are sending prices of Indian real estate to bubble levels. "India's growth, though less stellar, does have the reassuring factor that the [risks of] asset price bubbles are less," says Rajat Nag, managing director general of the Asian Development Bank in Manila.

India maintained robust growth without Beijing's hefty stimulus in part because it is less exposed to the international economy. China's exports represented 35% of GDP compared with only 24% for India in 2008. Thus India was afforded more protection from the worst effects of the financial crisis in the West, while China's government needed to be much more active to replace lost exports to the U.S. More significantly, though, India's domestic economy provides greater cushion from external shocks than China's. Private domestic consumption accounts for 57% of GDP in India compared with only 35% in China. India's confident consumer didn't let the economy down. Passenger car sales in India in December jumped 40% from a year earlier. "What we see [in India] is a fundamental domestic demand story that doesn't stall in the time of a global downturn," says Asianomics' Walker.

The Indian economy is not immune to risks. The government has to contend with a yawning budget deficit, and last year's weak monsoon rains will likely undercut agricultural production and soften rural consumer spending. But rapid growth is expected to continue. The World Bank forecasts India's economy will surge 7.6% in 2010 and 8% in 2011, not far behind the 9% rate it predicts for China for each of those years. Indian Prime Minister Manmohan Singh, when speaking about his country's more plodding pace of economic policymaking, has said that "slow and steady will win the race." The Great Recession appears to have proved him right.

 

[pmaitra]

This is a very interesting report and thanks to kickok1975 for posting this.

So kickok1975, what do you see in PRC since the global recession started? I understand there has been stimulus and increased government spending. Are you seeing a lot of new settlements, roads, railways and bridges coming up? Do you also see a lot of new factories being setup? Moreover, has there been price rise of essential commodities?

Thanks.

 

[kickok1975]

Pmaitra,

I saw a lot of layoffs in Eastern China at the beginning of the recession. Since I attend Canton Fair (The biggest China trade fair) every time, I also witnessed significant drop of visitor volume during 2009. However, I didn't see any slowdown of government spending. On the contrary, I saw more roads, buildings, high speed railways and freeways were built between 2009 and 2010.

Now the market just turned to opposite side. There are labor shortages everywhere and every trade shows, including CES in Las Vegas are packed. The housing market and consumer price in China are skyrocketing and so far no sign of slowing at sight. I saw fewer opening of small business but many people are speculating real estate market. It's a sign of worrisome though

 

[pmaitra]

^^ You mentioned speculation in the real estate market. Is there no limit as to how much property an individual could own? Speculation could typically mean, among other things, some wealthy persons buying a large number of houses or land and then selling them when the price goes up.

 

[amitkriit]

India's economic miracle will not sustain itself if fundamental changes aren't introduced quickly, and the basic need is to fight corruption and introduce macro-economic changes which can assist our small and medium sized industries and ensure transparency inside corporates and the governments. In USA small and medium sized companies employ more than 75% of the manpower. India will have to adopt policies which may assist the medium sized companies in India to compete with large sized corporates which are well known of deploying unethical tactics and money power. Sectors like defense must be opened to small players. India must ensure job for our semi-skilled manpower, which will require investment in infra and manufacturing sectors. Growth in China is driven by Government, in west its sustained by entrepreneurs.

As far as competing with China is concerned, India lags behind by at least 25 years, China today wields massive economic and strategic influence which India can only dream of at the moment. India must not asses herself on the basis of "China vs India" reports being published in western media, India is more than capable of judging her current strength and weaknesses.

 

[kickok1975]

Some of the problems now in China are wealthy people holding too many properties but regular people struggle to afford a single appartment. People are holding their propteries in unticipation of further price increase which is unsustainable.

State controled bank would rather lend money to big state companies than private business. Private business has to borrow money from other source with high price plus they have to endure all cost post on them by government. Their profit margins are further drained and have less incentive to invest in business. Some owner would use their money on speculation in hope of get rich quick which enlarges the real estate bubble.

 

[Iamanidiot]

Pmaitra,

I saw a lot of layoffs in Eastern China at the beginning of the recession. Since I attend Canton Fair (The biggest China trade fair) every time, I also witnessed significant drop of visitor volume during 2009. However, I didn't see any slowdown of government spending. On the contrary, I saw more roads, buildings, high speed railways and freeways were built between 2009 and 2010.

Now the market just turned to opposite side. There are labor shortages everywhere and every trade shows, including CES in Las Vegas are packed. The housing market and consumer price in China are skyrocketing and so far no sign of slowing at sight. I saw fewer opening of small business but many people are speculating real estate market. It's a sign of worrisome though

Kickok you are saying stimulus used to fund a construction boom and fuel groth out of that.How long and how far will it last?Is this sustainable?Me thinks no.

Kickok from what Iam learning about China's economy I can understand that India's economic health is a hundred times better than China.Speculation is out of question in the real-estate sector and getting a loan from a bank is not at all easy ,they also give loans based on your current earning and assets not on your projected future income and growth.Plus we have a very large underground black economy that shields us .India does not have these many bubbles.

My suggestion to Chinese Invest lot of your savings in gold and hide it in a secret stash or your bank locker

 

[civfanatic]

China today is much like America in the late 1800s. That period of American history is called the "Gilded Age", which means "covered in gold". It was called that because the economic, social, and political situation seems excellent on the outside, but there were major problems behind the scenes, including rampant political corruption, monopolies, unfair economic practices, and rising social tensions due to huge economic disparities. China today, despite all the hoopla about "China Superpower" and "China is going to conquer the world", is in a very similar situation.

It should also be noted that the American GDP per capita in 1900, a century ago, was greater than both India's and China's GDP per capita today.