China and india offer different attractions

Michael Power, a strategist at Investec Asset Management, talks to Frances Hughes

Q: Do you think Chindia (China and India) funds will become the new Bric (Brazil, Russia, India, China) funds?


Single-country funds are not popular any longer, but both countries are big enough to warrant their own funds. China is not one country; it is a collection of regions, all very different in terms of economic progress.

Q: What are the main similarities between India and China?


The most bizarre similarity is that they have not pulled their weight in the global economy, but now they are beginning to work. There are many similarities and many differences. They are both low-cost, China more so in manufacturing and India more so in services. But this split will not be valid for much longer. By 2010 they will be competing with each other in both areas.

The barriers to entry on services are higher than the barriers to entry on goods. It is easier to compete in goods. Both will be extremely competitive in manufacturing.

Q: What are the main differences between the two countries?


The political structures and demographics. India is less production-oriented than China and China is less consumption-oriented than India.

India is far more democratic, with a free press. It also has a much better endowment of irrigable land to grow its own food. China has a major problem with this. China also has a problem with pollution. But China has spectacular infrastructure, whereas India does not.

Q: Do you think it makes sense to combine the two countries in one fund?


I do not see a particular reason for doing so. It is just cashing in on an acronym. I would not invest in a Bric or a Chindia fund. There are better ways of skinning that cat. I would invest in a diversified emerging markets fund or a single-country fund.

Q: What are the main obstacles to successful investment in India and China?


China in the next 10 years, possibly sooner if there is a hiccup in the economic growth rate, will see greater demand for political liberalism. Also, there is the question of pollution. But the [Chinese] government is paying more attention to promoting green solutions to decrease pollution. It is also promoting the interests of the poor. There is a growing income disparity in China and it concerns the powers that be in Beijing.

There are “five harmonies” in China [including the two above]. The others are: moving from rural to urban areas, more consumption and less production to get a more balanced economy, and more development in western China. Eastern China is incredibly well developed, but the west is not. These are going to be the guiding forces behind China.

In India there is a problem with infrastructure. I am not too concerned about the politics. But there could be a problem if India’s current account deficit becomes too big. Both countries are picking the low-hanging fruit at the moment. It will get more complicated. They are running out of skilled people, so there needs to be more emphasis on education.

Q: China is a more urbanised society than India. How important is this?


Urbanisation is driving everything. It is important for investment and growth. There are 10 million jobs created in China every year. The story is not going to be over the day after tomorrow; it will run for 15 or 20 years.

One other issue is we have wrongly assumed that India and China are at the bottom of the ladder. There are lower wages in countries such as Vietnam, Bangladesh and Pakistan. A recent report by Merrill Lynch was titled “Is Indonesia the next India?” Three years ago we were saying “is India the next China?” There are plenty of other countries that can undercut China and India.

Vietnam has a population of 90 million people. It is the second fastest growing economy in Asia now.

Q: What are the positive drivers for investment in India and China?


From the point of view of products being exported from China and India, it is a low-cost centre. They are big-population countries. When the flywheel of consumption gets going it is a good place to be investing. The big attraction is the size of the market and the potential of the consumer base.

There are great companies in India – for example, Hindustan Lever, which sells shampoo to the masses. And there are some extraordinarily good pharmaceuticals – potentially world-beating companies. It is not just IT.

In China there is good growth in terms of consumption and it is becoming an important place for premium brands. Rolls Royce now sells more in China than in any other country in the world.

There are some good growth industries in both countries, like the steel industry. There are huge players and world-beaters. It will be interesting to see what rolls out in the next four to five years.

Q: China is growing at a faster rate than India. Is this a problem?


India’s GDP is growing at 8.9%. It might not be China’s 10.5%, but it is no slow-moving elephant. It has been more than 8% for the past three years. India is centre-stage now.

Q: Income per head is still low in China and India and it is predicted to remain relatively low even in 2040. Does this pose a problem?


You have got to start from somewhere. The reason they are growing is because the income per head is so low. Collectively China will have the same consumption power as the US because it has four times as many people. It is the power of numbers.

Q: India’s widespread use of the English language is beneficial at a corporate level and for competing for outsourced contracts. But China does not have this. Is this important?


It is a huge issue and is a huge advantage for India. It is more in tune with the Western world, although China is working on that. You cannot go anywhere in China without someone wanting to practice their English on you.

[Some say] the Olympics are being used as a pretext to teach English, and 300 million people in China are currently learning. It is a huge campaign locally. But the Chinese are learning English, while Indian call-centre workers are learning regional accents.

Q: Is there much competition to Indian call centres?


The Philippines is becoming a call centre competitor to India. Big fleas always have little fleas to bite them. There are some big-population countries in the waiting room.

Q: In terms of commercialism, what is the situation in China and India?


India is much more commercialised. On the streets it definitely feels more consumer-oriented than China. China has some very glamorous malls, but it does not feel the same as India, where commercialism and consumerism are everywhere.


joined Investec Asset Management as a strategist in December 2002. Prior to this he worked at Baring Asset Management as a director in its emerging markets department. He was head of Africa and the Middle East and Baring’s natural resources sector. He was also portfolio manager for the Pan African Simba fund. He has previously worked at NM Rothschild & Sons/Smith New Court, HSBC – Equator Bank, Kenya, Chase Manhattan Bank and Anglo American’s international corporate finance department in South Africa.