August 30th, 2012
by Elliott Morss, Morss Global Finance
With populations of more than one billion, China and India are by far the largest countries in the world (together, 36% of the world total). And while neither has a GDP as large as the US, they are two of the most rapidly growing countries: According to the IMF, China’s GDP will grow by 8.2% in 2012 with India not far behind at 6.8%. Just how they progress over the next decade will be extremely important for all of us.
Remember how excited people were about India just a few years back? Between 2000 and 2007, the Mumbai SENSEX rose 400% while the Shanghai Composite only increased 200%. Things have changed. In this article, I review developments in both countries with an eye to investment possibilities.
As Table 1 indicates, China’s land area is three times larger than India’s. That, coupled with China having only a slightly larger population than India means a much higher population density in India. But arable land in China is remarkably low, and that is why agriculture is so labor intensive.
Source: World Bank
Poverty, Education, and Health
In 1970, India had a higher GDP than China. As Table 2 indicates, that has all changed, with much of China’s growth coming in the last two decades.
Source: World Bank
By almost any measure, China is more developed than India. In addition to its GDP per capita being more than three times higher than India’s, a much smaller percent of China’s people live in poverty, and life expectancy is 8 years less in India than China. It would appear that China has made a far greater effort to educate and inform its citizens than India. Its adult literacy rate is much higher, the percentage of children attending secondary school is higher, and the access to electricity and the Internet are all higher in China. And the lower fertility rate in China will have great significance in future years.
Source: World Bank
The transport systems of China and India are quite different. China's highways are being developed rapidly, with an expressway network of 85,000 kilometers and growing at the end of 2011. In contrast, India has only 1,000 kilometers of expressways.
As Table 4 indicates, China’s energy consumption per capita on roads is more than twice India’s. In contrast, railroads are far more heavily used in India than China: the total length of rail lines is about same even though China is three times larger than India. In 2010, India had 903 billion rail passengers (passenger-km) while China had only 791 billion.
Source: World Bank
Looking ahead, the ownership and use of motor vehicles in both China and India are likely to grow rapidly with heightened demand from their growing middle classes. Note that in the US, there are 802 motor vehicles per thousand people. It is interesting to ask what will happen to oil consumption when there are 400 motor vehicles per thousand people in both China and India. That would mean more than an eightfold increase in Chinese vehicles and more than a twenty-two-fold increase in India. Assume they drive the same distances as the current vehicles, are powered by and get the same miles-per-gallon as the current vehicles. This growth would increase global oil demand would increase by 42% over its current production level. This will not happen: oil production cannot be increased by that amount. Major changes in engine power technologies are needed.
A country’s transport system is clearly important in affecting its energy needs. As Table 5 indicates, 81% of India’s energy imports are for oil and 53% for China. In both countries, coal is the primary energy source with very little coming from natural gas and renewables.
Source: International Energy Agency
* Renewables include nuclear, hydro, solar, wind, and geothermal.
China consumes more coal than any country in the world. And there is a problem. China is running out of coal. As Table 6 indicates, China only has 35 years of coal left at current production rates. In contrast, the US has 270 years left and India 77. The Chinese authorities are very aware of their coal predicament and are doing all they can to find new energy sources and cut down on coal consumption. But it will be a slow process.
As mentioned earlier, both China and India continue to grow rapidly. But there are several major differences. China continues to invest heavily in infrastructure to accommodate its growing middle class while India is only starting. In Table 7, I compare China and India with Greece and Spain, the two Euro countries that have required bailouts. Note that India’s government deficit is higher than either Euro country. That means its debt is growing rapidly, and it is already quite high. And India’s current account deficit is already higher than Spain’s.
In 2010, as the world started to recover from the global recession caused by the US banking collapse, I recommended investing in emerging market countries because they were growing more rapidly and had less debt than developed nations. Unfortunately, we had the sovereign debt crisis in Europe. And sadly, as I have written, the sovereign debt crisis has not been resolved and more global financial panic can be expected.
And in this context, the question is whether investments in China or India are warranted. The economic problems in India, illustrated in Table 6 are extremely serious. And they are likely to get worse. Stay away from India.
China is not facing such immediate problems and it has a government that can get things done. However, it is a natural resource poor country and its longer term energy/other raw material needs are problematic. However, it is has a positive economic outlook with a rapidly growing middle class. So two ETFs and one mutual fund are worth considering:
- FXI is a general ETF for China. Over the last 12 months, it is down almost 20% and down 1% so far in 2012.
- CHIQ is a consumer goods ETF for China. It is down almost 28% over the last 12 months and down almost 4% in 2102.
- MCHFX is a China mutual fund. It is down 17% for the last 12 months but up 2% this year.
For China, I prefer well-managed mutual funds to ETFs and I hold MCHFX.
The Euro crisis has to be kept in mind, so I believe in high yield, low risk investments for now. What do I believe is low risk? The US real estate cycle has bottomed out. Fidelity Real Estate Income (FRIFX) has a dividend yield of 4.6% and it is bound to improve as the US real estate market continues to recover.
There are also low risk emerging bond investments worth considering. TGEIX is an emerging market mutual bond fund yielding 5.6%. ELD is an ETF with a quite conservative set of emerging market bonds yielding 3.6%.
And finally, Brookfield Asset Management (BAM) is a well managed company with real estate and energy holdings. It is not a high dividend stock, but is has gained 27% this year. I expect it will go higher.
About the Author
Elliott Morss has a broad background in international finance and economics. He holds a Ph.D.in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance