Chindia- The new Brown-Yellow Peril

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Chindia- The new Brown-Yellow Peril. Economists have created a new work Chindia. The new Brown-Yellow Peril , Chindia: the term stands for the two most populous nations of the world cooperating peacefully instead of clashing in unending rivalry, their economies complementary rather than competing, with China the workshop of the world and India the global service center.

CNN and BBC are having specials on Chindia this week.

“The Asian Challenge” was the topic a senior German diplomat addressed at a recent German-American conference. Barely three weeks later, Die Zeit, Germany’s leading weekly newspaper, splashed the title “India and China: Assault from Asia” across its front page, illustrated by a fearsome dragon- and tiger-headed monster encircling the globe, its sharp claws dug deep into Europe. The new Brown-Yellow Peril has quickly been given a name, too: Chindia.

Chindia: the term stands for the two most populous nations of the world cooperating peacefully instead of clashing in unending rivalry, their economies complementary rather than competing, with China the workshop of the world and India the global service center.

This is no longer a scenario for the distant future. Already today, the legion of factory workers in China comes to 109 million–more than twice the 53 million factory hands in all the G-7 countries together. And already now, nearly half of the global services market is handled in the back offices of India. European and American companies increasingly outsource production to China, and business processes from design, bookkeeping and auditing to legal work and call centers to India.

The dynamism of the two Asian giants pushing for their places in the sun causes a great deal of insecurity in both Europe and America. Blue- and white -collars employees fear for their jobs. Political leaders fear for their hold on power, because the unemployment figures in many countries stubbornly resist all job creation schemes. As the economic hegemony of the West is drawing to an end, there is a pervasive fear that the old industrial nations are going to wind up on the losers’ side of globalization.

But while European and American jobs may be threatened, European and American consumers have profited immensely from goods cheaply produced in China and India. Even their booming exports, like Japan’s, owe their competitiveness to sizeable inputs from Asia’s up-and-coming nations.

The dream of Chindia is a worthy one. There is little reason for the West to consider it a nightmare. Turning dreams into reality is not an easy exercise. Japan’s example holds an important lesson. Circumstances may change; a seemingly irresistible momentum may suddenly lose its propelling force; the inability to reform in time and move on toward new horizons can dramatically diminish a nation’s prospects. And both China and India still face enormous social problems: abysmal poverty of hundreds of millions; bureaucracy and corruption: the drawbacks of dictatorship in China, the deficiencies of democracy in India.

So the West would be well advised not to wax hysterical. Asia’s trees won’t grow to the sky. If the old industrial nations remain innovative and entrepreneurial, they have no reason to fear the rise of Chindia. They should engage India and China, though, to make them responsible stakeholders of the international community–to make sure that the impending power shift is consummated in a peaceful manner and that everyone plays to the rules.

For the Japanese, this shift raises the question of how they are going to fit into the new power pattern. The Europeans face quite a different problem–one that has nothing with today’s concerns.

It is a demographic problem portending an upheaval of secular significance. In 1900, Europe accounted for 20 percent of the world’s population. Today, this figure is down to 12 percent. By 2050 it will drop to 7, by the end of the century to 4 percent.

This development will necessitate an agonizing reappraisal–a rethinking of Europe’s role, its chances and prospects in a world where it is going to be numerically marginalized.

http://www.asahi.com/english/Herald-asahi/TKY200605090104.html

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Re: Chindia- The new Brown-Yellow Peril

“Chindia” is a portfolio concept that could lead to unwarranted conclusions and allocations.

http://seekingalpha.com/article/58725-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:

http://seekingalpha.com/article/58725-chindia-a-misleading-portfolio-concept

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.

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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.

Richard Shaw