“Chindia”: A Misleading Portfolio Concept

China and India are two tremendously important countries to the future of the world economy. They are both growing rapidly, accounting for about 1/3 of the world’s population. Their evolving business enterprises and resource consumption patterns are disruptive to the world business order. They are displacing developed countries in terms of GDP ranking.

However, China and India are not a unit and thinking about them as “CHINDIA” is probably not a good portfolio management idea. They are quite different and should probably be thought of and dealt with separately in a portfolio. The Chindia concept is a really good marketing concept for fund sponsors seeking various ways to attract investors, but the packaging may not be best for portfolio management purposes.

We believe that China and India are more competitors than partners; each developing from opposite ends of the manufacturing to services spectrum. They are sufficiently different in our view that investors should invest in them through single country funds such as (INP) or (IIF) for India; or (FXI) or (CAF) for China.

Buying a single Chindia fund, such as First Trust ISE Chindia (FNI) locks the investor into a particular country allocation (2/3 China and 1/3 India today) which may or may not be ideal and which limits allocation flexibility. We also expect that many investors in Chindia funds do not know the country allocation they are getting.

In practice, we recommend investing in single country funds of any kind only after first establishing a core emerging markets position through a diversified emerging markets index fund such as iShares (EEM) or Vanguard (VWO).

The qualitative arguments for equivalency or difference abound. This article presents objective, quantitative differences that support our argument that the two countries should be dealt with separately.

Some Qualitative Arguments for Difference:

BARRON’s December 24, 2007, Arjun Divecha, Partner, GMO said, “India has benefited hugely from this misperception of Chindia. By linking China and India together, people think that India is in the same league as China when, in fact, it is not.”

Divecha says that India is where China was 15 years ago and is overvalued as a result of being tied so much to China in investor’s thinking.

WikiPedia says:

The economic strengths of these two countries are widely considered complementary - China is perceived to be strong in manufacturing and infrastructure while India is perceived to be strong in services and information technology. China is stronger in hardware while India is stronger in software. China is stronger in physical markets while India is stronger in financial markets.

… However, there are also geopolitical differences between China and India that some argue would make this term [Chindia] inappropriate … [including] effects of the Sino-Indian War of 1962 … Their political systems are also vastly different, with China being ruled by a single party and India being the world’s largest democracy.

Also of great importance, India has a larger problem with terrorist attacks and violent independence movements than China. Pakistan and its vulnerability to Al Qaeda and related movements is a specific risk to India for which there is no comparable risk for China.

QUANTITATIVE PERSPECTIVE:

These data are taken from several sources, including the U.S. Census Department, the CIA Factbook, the United Nations, the International Monetary Fund, the Economist Intelligence Unit and some others.

Country Risks:

India presents lower country risk than China. The Economist ranks the banking risk of India BBB and China B. It ranks the Political risk of India BBB and China B. Both countries are ranked BBB in terms of sovereign debt default risk and currency risk.

Country risk here does not speak to market risks associated with valuation.

Stock Markets:

The market capitalization of the 10 largest companies today in China is $1.8 trillion, whereas the market capitalization of the 10 largest companies in India is only $0.5 trillion.

Similarly, at year-end 2006 the total stock market capitalization of China was $2.4 trillion versus India where it was only $0.8 trillion.

Direct Investment:

China has received more than 10 times the total foreign direct investment as India ($700 billion versus $68 billion).

China has made direct investments abroad that are more than 3 times that of India ($67 billion versus $21 billion).

GDP:

The Chinese GDP expressed in US dollars is three times the Indian GDP ($2.5 trillion versus $0.8 trillion). On a purchasing power parity basis, the Chinese GDP is two and a half times the Indian GDP ($10.2 trillion versus $4.2 trillion).

Growth in per capital GDP has been quite different as the multi-year chart below shows:

Current Account Balance:

China’s current account balance is positive and growing strongly, while India’s has meandered and recently gone negative, as the chart below shows:

Energy:

China produces 3 times the electricity of India; more than 4 times the oil; and more than 1.5 times the natural gas. On the consumption side, China consumes more than twice the oil of India and almost 1.5 times the natural gas.

Other Resource Consumption:

China recently accounted for 29% of global zinc consumption compared to 3.8% for India. China accounted for 25% of world aluminum consumption compared to 2.6% for India. China’s share of global oil consumption was 9% versus 3% by India.

Population:

Approximately 1/3 of the world’s population is either Indian or Chinese, but the populations of China and India are quite different from each other.

India’s population is smaller than China’s, but is growing more rapidly. In 1995, China had nearly 33% more people. By 2005, China had less than 20% more people. By 2025, their populations will be about equal. After that, India will have a larger population.

You can see from the chart below that China and India have quite different population structures.

India has a population that is growing younger and that will continue to supply young people to the labor force for a long time. China has an aging population that will show labor supply problems without net inflow of migrants. India today has 6 times the number of people migrating out of the country as China. China has a 40% lower infant mortality rate than India, and a longer life expectancy.

Labor and Income Distribution:

China and India have roughly equal acreage of arable land, but China has a much smaller portion of its people in agriculture than India (45% versus 60%). China has twice the proportion in industrial jobs (24% versus 12%), and a similar portion in service jobs (31% versus 28%).

China has a lower rate of urban unemployment (4.2% versus 7.8%) and far fewer below the poverty line (10% versus 25%) – although we don’t know how reliable that may be. Both have about 1/3 of total income in the hands of the top 10% of households.

Literacy:

Literacy is dramatically different. Only 61% of Indians over the age of 15 can read and write, while nearly 91% of Chinese over 15 can read and write. The development and therefore economic value of women is higher in China where 86.5% are literate, whereas in India only 47.8% of women are literate.

Religion:

The religious composition is dissimilar.

Hindus account for over 80% of the Indian population, but are negligibly represented in China. Muslims account for over 13% of the India population, but are only about 1% to 2% of the China population. Christians are about 2.3% in India and 3% to 4% in China.

China does not report religious composition as thoroughly as India, but China is greatly influenced by Taoism and Confucianism which have ancient roots there. India and China do not have similar populations in terms of guiding belief systems.

Languages:

India has numerous regional languages with English as the official government and business language. China has one basic language with regional variations. Mandarin Chinese is the standard language.

Legal system:

India’s legal system is based on English common law while China’s is based on civil law derived from the Soviet Union and continental European legal principles. India’s judiciary reviews legislation, while China’s legislature retains the right to interpret its laws. India accepts compulsory International Court of Justice jurisdiction, while China does not.

Political System:

India is a multi-party democracy. China is a single-party controlled state.

Land:

China has 3 times the land area and 2 times the coast line length of India. China has a lower percentage of arable land, but the total acreage of arable land is about the same in both countries.

Natural Resources:

India has the fourth largest coal reserves in the world, while China has the world’s largest hydropower potential.

Transportation and Roadways:

India and China have roughly equal mileage of paved roads, but with 3 times the land area, the density of roads in China is much less than in India. The rail density is closer to parity, but India does have higher rail density than China.

In terms of major airports (those with paved runways over 3,000 meters), China has 58 and India has only 18.

Telecommunications:

India has more than 3 times as many cell phones as China, but China has 7 times as many land lines as India. Combining cell phones and land lines, India has twice as many phones as China, yet a slightly smaller population.

China has more than 2 times as many internet users as India.

Military:

China spends 4.3% of its GDP on its military versus 2.5% by India. In total US dollars, the Chinese military budget is five times the size of the Indian military budget.

* * *

From almost every metric, China and India are very different countries. They are neighbors. They are important and disruptive to the old order of things. They are interesting investments, but they are not unified and “Chindia” is a portfolio concept that could lead to unwarranted conclusions and allocations.

We recommend analyzing and treating India and China as separate portfolio investments.

Comments

[VTCastle]

Great overview for readers who only know what CNBC tells them. A definite bookmark for future reference.

[User 90255]

great statistics even for Chinese or Indians to know how they compare.

[William L.Florida, CFA]

This is very interesting and useful, but the best measure would be correlation of returns. Why don't you write a follow-up to publish that?

[jagorev]

It should be obvious, of course, that the world's two largest countries are hardly interchangeable, but thanks for posting - might help to clear up some of the Chindia BS. To me, it seems that India is a safer and more sustainable long-term bet at this point.

[Yifan]

Great post! Thanks!

[Richard Shaw]

Bill Florida,

You point is valid to an extent, but I don't entirely agree. Correlation is a measure of the past, while my argument is an argument about the future or what should be the future. Since I have taken the position that a false sense of sameness has driven the coinage of the term CHINDIA and the formation of Chindia funds, I would presume more correlation (past) that is warranted, and that the future will/should change as the differences are more clear to more investors.

In any even the 1 yr correlation between FXI (China) and IIF (India) is 0.72 according to the SSGA Correlation Tracker (a price correlator, not a total return correlator), and the 6 month correlation is 0.83. Longer term correlations among those products are not available on that site due to the short life of FXI.

I don't have the index data readily at hand, but the correlation is not so high that the countries could be considered as a unit.

[Jon Jacobs]

Great point, that lumping the two is more a fund marketing ploy than a credible investment concept. A year or so ago I expressed a similar view about "BRIC", the faddish aggregation (Brazil, Russia, India, China) that became all the rage after a 2005 Goldman Sachs study. Nothing against investing in any or all of those economies; it's just that touting them as a single coherent portfolio makes no sense. If those four truly represent the best destinations among emerging markets, then the intelligent choice would be to invest in EM funds overweight them - not dive into a faddish concept whose portfolio manager is deprived of the flexibility to diversify across emerging markets (or reduce the overweighting to BRIC if/when those markets become overvalued - which the probably are already).

[User 135944]

Not quite sure you got the phone line numbers from. The land line number is 311 million vs 67 million. The cell phone is 400 million vs 100 million. China are both in the lead. It is easier to just go to the web site and read the table www.wakeupcall.org/chi....

[astralguide.com]

BRIC or Chindia are merely convenient terms but can never be considered equals. The writer is right that investors should treat each of them on their own criteria and not homogeneously.

However on longer term both have somewhat hot economies which some people think are like bubbles about to explode. But I think all these new BRIC economies and some other smaller ones will sustain a managable level of growth which will be slightly more than highly developed nations. No doubt about that.

Now expecting them to remain as hot as they are today is naive. There is certainly great economic activity in almost all developing countries specially Russia, Brazil, India and China but keep in mind that only a portion of China is really the cause of the industrial boom, which is closer to Hong Kong, more specially the next door Guangdong province. Most of the rest of the China is not growing so feverishly.

I do expect that sooner than later China will have serious political crisis and that will hinder or suddenly put a burst on all this economic boom. This will be triggered by the Chinese hegemonistic attitude towards neighbouring areas like Taiwan, Myanmar, Vietnam, India, Pakistan and Indo China and perhaps Korea. Chinese are also expected to have major political implosions internally over the next 24 months due to increasing gap between the haves and have nots.

Over all nothing is certain anywhere. Eventually the United States will emerge as the best emerging market for next 2/3 years.
astralguide.com

[Richard Shaw]

User 135944

The phone data came from CIA Factbook. Your source may be more correct. I have no way to know which is a better number.

The URL for the comparison is a good one. Thanks.

[User 93185]

It is a very interesting article. Chinese and Indian cultures/ways of thinking are totally different. To put China and India to a group is just too naive and simplified.

[S. Rein]

More than 50% of the world's number of cellphone users with over 500 million are in China. If that is an updated CIA factbook you are using, then that explains why the US is mucking it up internationally.

S. Rein

[semuren]

First , I agree with your general argument that China and India are very different and so investors should treat them as such . But I have to make one point about the language situation. Arguing that:

“India has numerous regional languages with English as the official government and business language. China has one basic language with regional variations. Mandarin Chinese is the standard language.”

perpetuates a misconception about the language situation in China. The linguistic ecology of China is very complex. Even leaving aside non-Chinese language (many which have official status of one sort or another), and non-Mandarin Sinitic languages (e.g. Cantonese), variation within regional varieties of Mandarin is sufficient that native speakers do not understand well or at all the colloquial speech of people from different regions or even socio-economic groups. By no means is there universal command of the standard language, Putonghua. Generally, more educated, younger, urban speakers, especially from the North of the country, tend to have better command of the standard language, but exceptions abound. I do not know much about the situation in India, but perhaps the ecology of Putonghua is somewhat similar to that of English in India, each being related to class (urban residency, education, wealth), and used in cross-regional communication.

[Richard Shaw]

Semuren,

You sound well informed and I appreciate your augmentation of this article.