China Vs. India: Which Country Should You Invest In?

Opportunities in Asia

China Vs. India: Which Country Should You Invest In?

We compare the economies and stock markets of two Asian economic powerhouses – China and India – to see which country offers better opportunities for investors.

Published on 3 November 2017

A quick comparison of China and India reveals a few similarities and a number of striking differences. The two countries are the most populous in the world with about 1.3 billion people in each. Almost 40% of the world’s population is either Chinese or Indian. But a host of other metrics illustrates how the two nations are very different.

At US$11.2 trillion, China’s economy is five times larger than India’s. Per capita gross national income (GNI) stands at US$8,260, providing Chinese consumers vastly greater buying power than their Indian counterparts who have a per capita GNI of only US$1,680. The data from 2016 in the chart below shows how the two countries stack up in various areas:

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Source: World Bank

The fact that the economies of both countries are growing at a rate of approximately 6% to 7% per year makes China and India highly attractive for overseas investors. Typically, the Western world and the developed economies barely manage to grow at a third of this rate.

For institutional investors as well as for individuals, the stock markets of China and India provide an opportunity to diversify their holdings as well as to earn high returns.

China’s stock market performance

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China’s stock market has performed exceedingly well so far this year. The iShares China Large-Cap ETF has gained around 32.2% in the period from the beginning of the year to November. Banking sector stocks have done particularly well: the four largest state-owned banks Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China, and China Construction Bank have gained around 13.2%, 37%, 14.5%, and 33% respectively so far this year.

China’s large-cap stocks have also been providing strong and steady returns. The FTSE China 50 Index has gained 23.2% since the start of 2017. Over the last three years, it has provided an annualised return of 8%, while five-year returns are slightly lower at around 7.9%.

Many Chinese stocks that trade on the US exchange are also providing stellar rates of return. Online retail giant Alibaba Group has gained about 111% since the beginning of January, while internet firm Baidu has clocked a 43% increase. Share prices of Aluminium Corp of China have soared by more than 100%, while China Lodging Group is up by over 130%.

Can this high-flying performance be sustained? There is no reason to think that an economic slowdown in China is around the corner. The Asian nation’s GDP grew at a respectable 6.9% in the first half of the year. Chinese authorities have said that the country will double the size of its economy between 2010 and 2020, and the indications are that this target will be met.

However, there is one factor that could hold China back. The country’s debt as a percentage of GDP currently stands at 235%. The IMF estimates that this will rise to 300% by 2022. According to the IMF, “International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown.” But there are no signs of this happening yet.

India’s stock market performance

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India’s stock market has also registered strong growth so far in 2017. The iShares India 50 ETF, which tracks the 50 largest Indian stocks, has gained 32.6% so far this year, and has provided investors with an annualised return of 7.06% over the last five years.

The five largest component companies in the index are:

Reliance Industries – A diversified conglomerate with interests in energy, petrochemicals, retail, and telecommunications. Its share prices have skyrocketed by 76% in the last 12 months.

Housing Development Finance Corporation – A financial conglomerate that controls about 39% of the housing finance market in India. Its share prices are up by 28% over the past year.

ITC – Formerly a tobacco company, ITC is now a diversified conglomerate with interests in consumer goods, hotels, and agricultural businesses. Its share prices have risen 11% in the last year.

HDFC Bank  – The country’s largest private sector lender and the leading issuer of credit cards. Its share prices have surged 47% in the last year.

Is the Indian stock market overvalued? Some analysts definitely think so. A recent analysis in Bloomberg Quint points out that Indian shares trade at higher price-earnings (P/E) ratios than their Asia-Pacific or global counterparts – indicating that the country’s booming stock market may be peaking.

The Indian government’s demonetisation drive in November last year has resulted in additional flows into the stock market as individuals had a two-month window in which to deposit old currency into their bank accounts. A large part of these funds has been subsequently used to buy company shares and mutual funds – which has caused equity valuations to be stretched.

India’s demographic dividend

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As mentioned earlier, the number of people in China and India is about the same, but a closer look at demographics reveals some striking and significant differences. About half of India’s population is under the age of 26 and it is expected that by 2020, the country will have a median age of 29. In that same year, the median age in China will be 37.

Indeed, the working-age population in China is already in decline. Every year, the labour pool shrinks by 0.5%. Meanwhile, 250 million people are set to join India’s workforce by 2030.

The rise in the working population in India could lead to higher disposable income and consumption – and this could give the Indian economy a great boost.

Of course, a rising population alone is no guarantee of economic success. But if India is able to capitalise on this advantage, it could rapidly gain ground and start registering double-digit growth.

The bottom line

The stock markets of China and India have both been booming this year, delivering solid returns for investors. What does the future hold?

Nobody knows for sure, of course. In the immediate future, China’s stock market may perform better than India’s. But in the medium- to long-term, the positions could be reversed as India’s demographic dividend kicks in.

What can be said with certainty is that both of these Asian economic superpowers will continue to offer a wealth of opportunity for investors in the coming years.

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