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China and India - Is Either a Good Bet?

© Elliott R. Morss, Ph.D.

August 2012

Introduction

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.

Physical Characteristics

As Table 1 indicates, China's land area is three times larger than India's. That, coupled with India having 147 million more people (a lot more), 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.

Table 1. - Physical Characteristics of China and India

China/India

Item

China

India

Ratio

Land Area (1000 sq. km.)

9,327

2,973

3.1

Population (in mil.)

1,191

1,338

0.9

Population Density

128

450

0.3

Arable Land (% Land Area)

12%

53%

0.2

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.

Table 2. - China, India GDP (constant US$)

Country

1970

1980

1990

2000

2010

China

100

183

445

1198

3246

India

120

161

276

475

973

China/India Differential

84%

114%

161%

252%

333%

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 birth rate in China will have great significance in future years.

Table 3. - Socio-Economic Data, China and India

Item

China

India

GDP per capita (current US$)

5,430

1,489

Poverty gap at $2 a day (%)

10%

25%

Adult Literacy Rate

94%

63%

Life expectancy at birth, total (years)

73

65

Secondary School Enrollment

81%

63%

Fertility rate, total (births per woman)

1.6

2.6

Access to electricity (% population)

99%

66%

Telephone lines (per 100 people)

26

3

Internet users (per 100 people)

35

7

Source: World Bank

Transport

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. By 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. By 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.

Table 4. - Transport Data - China, India, and the US

Data

China

India

US

Road energy consumption per capita (kg of oil equivalent)

92

37

1,640

Road energy consumption (kt. of oil equivalent)

122,774

45,194

503,054

Goods transported by road (million ton-km)

3,718,882

na

1,889,923

Passengers carried by road (million passenger-km)

1,351,144

na

7,874,329

Motor vehicles (per 1,000 people)

47

18

802

Goods transported by rail (million ton-km)

2,451,185

600,548

2,468,738

Passengers carried by rail (million passenger-km)

791,158

903,465

9,518

Rail lines (total route-km)

66,239

63,974

228,513

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 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.

Energy

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.

Table 5. - Energy Sources in China and India, 2009

Item

China

India

Imports, of which

15%

35%

--- Oil

53%

81%

Production Shares

Coal

67%

42%

Oil

17%

30%

Biofuels/Waste

9%

24%

Natural Gas

3%

7%

Renewables*

4%

2%

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. By 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.

Table 6. - Coal Consumption and Reserves (mil. tonnes)

Proven

Years of

Country

Consumption

Reserves

Coal Left

China

3,309

114,500

35

US

879

237,295

270

India

785

60,600

77

Source: BP: Statistical Review of World Energy, 2012

Economics

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.

Table 7. - Economic Data, Selected Countries, 2012

Item

China

India

Greece

Spain

GDP (bil. US$)

7,992

1,779

271

1,398

Govt. Def. (% GDP)

-1.3%

-8.3%

-7.2%

-6.0%

Govt. Debt (% GDP)

22.0%

67.6%

161.2%

79.0%

Current Acct. (% GDP)

2.3%

-3.2%

-7.4%

-2.1%

Source: IMF

Investment Implications

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's 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 has a positive economic outlook with a rapidly growing middle class. So two ETFs and one mutual fund are worth considering:

  1. FXI (NYSEARCA:FXI) is a general ETF for China. Over the last 12 months, it is down almost 20% and down 1% so far in 2012.
  2. CHIQ (NYSEARCA:CHIQ) is a consumer goods ETF for China. It is down almost 28% over the last 12 months and down almost 4% in 2102.
  3. 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 (MUTF: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 (NYSEARCA:ELD) is an ETF with a quite conservative set of emerging market bonds yielding 3.6%.

And finally, Brookfield Asset Management (NYSE:BAM) is a well-managed company with real estate and energy holdings. It is not a high dividend stock, but it has gained 27% this year. I expect it will go higher.

Source: China And India: Is Either A Good Bet?