Waking up to China

Dipen Sheth

For nearly two decades, Indians have marvelled at the fast-paced growth of China. But we stopped at that. As an economy we are still not learning from our neighbour’s bold strides. And as investors we almost sat dummy for the longest time. Why didn’t we invest in Chinese companies with galloping growth rates?

Initially of course, lack of opportunity can be blamed. The stock market route was unavailable and global funds had not been launched in India. But now that they have, fund managers are still not aggressive enough about offering investment options in a country which has the dual benefits of a large economy and a fast-growing one.

The latest buzz is that we may be late—China’s growth has peaked. The rumour is not all fluff. There is serious trouble brewing for this tiger-like economy. China is a huge guzzler-importer of commodities, particularly crude and iron ore (both up six times or so in the past three years).

Apart from being the world’s production centre for almost any industry you can think of, it produces copious quantities of basic materials such as cement, steel and aluminium, all of which might cool off after hitting a domestic ‘Olympic’ high and run into economic slowdown.

China’s economy is heavily skewed towards exports (38% of GDP) and certainly not domestic consumption (only 36% in contrast). Its largest trading partner, the United States, is flirting with recession, as are many of its other trading allies in Western Europe. Should the export engine stutter, China can stumble.

In an ominous sign of things to come, its first quarter exports in 2008 rose only 5.4% as against the recent norm of 25-30%.

Even after falling some 40% from its peak, the Shanghai Composite Index is still up 37.7% since early 2005 against 33.4% for the BSE Sensex (annualised returns). But even as we go to press, oil is hitting all-time highs at over $130 and the Chinese government is caught in a bind, raising reserve ratios in a muted response to rising inflation.

But my latest week-long holiday through Beijing and Shanghai belies these figures. The level of prosperity in China is amazing. Frankly, one is conditioned to (and prepared for) the high prosperity levels and efficiency in developed countries like the UK, Singapore, US and most of Europe. But I had never expected to feel the same about China, and, well, envy its success.

China’s gleaming transport infrastructure stands out in sharp contrast with the rickety and crumbling edifices that dominate India’s public spaces. Almost all of it is available for free (or at affordable prices) for citizens. Yes, it’s government built but still managed efficiently.

Subways, airconditioned buses, giant airports and roads that would do California proud are available for the citizens of Beijing and Shanghai. And it’s already adding an annual power capacity equivalent to what India intends in the latest five-year plan! We got a spectacular view of Shanghai from the top of the Lupu bridge (a cool imitation of Sydney’s world famous harbour bridge), and saw incredibly tall and modern buildings like the Pearl Tower, the Jinmao observatory and the Shanghai World Financial Centre in a single day. I thought it beat San Francisco and New York hands down.

Was this really a country with only $3,200 per capita income? Even in PPP adjusted terms (which marks the dollar to a more practical “purchasing power parity” rate instead of the nominal rate), China’s per capita income is only around $7,000 against India’s $3,000 (though you would certainly not guess it from how Beijing and Shanghai look!).

Makes one wonder how it all works. Here’s a country with a bigger population problem than India’s and which carries a longer legacy of state ownership and control over the economy. Their environmental issues are as bad as ours, if not worse. Internal schisms threaten to disrupt life everyday in Tibet, while some not-so-friendly neighbours (Korea, Taiwan, Japan and India included) keep Chinese foreign policy framers busy round the clock.

And how is it faring? Their economy is almost four times larger than ours and it’s growing faster. When it comes to economic integration with the world, China exports more than nine times what India does, and runs a trade surplus of over $250 billion compared to India’s $80 billion deficit in 2007. Almost all the Fortune 100 companies have some outsourcing or own manufacturing arrangements linked with China—even today a “communist” country.

But most of all, it is the evolving Chinese mindset that caught my attention the most. There were young, hardworking and ambitious people wherever we went. They were clearly driven by the desire to become more prosperous, seemed to be confident and were disciplined in their efforts to climb the ladder of wealth. Best of all, they seemed open minded about reforming their own ways and were curious to find out more about other countries.

Meanwhile, as if the controversies over the Tibetan unrest in full view of the Beijing Olympics countdown were not enough, China has been hit by a terrible natural disaster: the earthquake in Sichuan. According to government statistics about 40,000 deaths have taken place and billions of dollars of wealth has been destroyed in the tragedy. Thankfully, the official response to this has been speedy, humble and (best of all) open. Foreign (and national) media coverage has not been muzzled, criticism of the quality of construction of public buildings such as schools has been accepted with openness and overseas aid efforts have been gratefully acknowledged and speedily pushed in.

My sense is that although the human tragedies will persist long after the tremors subside, China will soon recover from the economic shocks of the quake. If the past two decades have been about the Chinese being the new suppliers to the world, the next few years might well see them becoming the new consumers. Some 1,400 million consumers with wallets fatter than those of a billion Indians are going to be hungry for consumption.

So it isn’t as though we missed the bus. China is poised to continue its stride forward. Are any of India’s businesses preparing for this market? More importantly, are any of the fund houses preparing to participate in the growth of Chinese companies?

I’m not sure, but it’s definitely a collective failure on the part of investment managers in India that they have been painfully slow to offer investment options in China and other Asian countries (especially a politically rejuvenated Taiwan, Malaysia, Singapore and Thailand) to us Indians. The law of my land allows me to invest $200,000 (about Rs 82 lakh) as an individual in such funds.

If UTI, HDFC, Reliance or ICICI Prudential already have such Asiafocused investment options, they are being defensive about giving them some overdue publicity. And what about some of the more respected foreign brokerages and investment houses that operate here? As India grapples with slowing growth and a potentially weakening currency over the next few quarters, such product proliferation should surely be welcome.

Dipen is head of research, Wealth Management Advisory Services.
He can be reached at dipen@wealthmanager.ws