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November 28, 2004

Differences between investing in China and India

China has a very strong government and a weak corporate sector. India has a weak government and a strong corporate sector.

Some extracts from an interesting interview in Businessworld with James J.C. Birch, managing director, Institutional Client Services (equities division), Goldman Sachs International, who recently escorted a group of twenty large institutional investors to India:
On the surface, as you step out of the airport, China appears to be light years ahead. It looks like Chicago. It's simplified by the fact that they have a one-party government. If they want to do something, it happens. But trying to find good companies to invest in is very difficult. China has an economy that has been fairly closed until recently. They don't have much history in competing on a worldwide basis. You (India) have companies who are leaders in their own field and have competed against the world's best companies in a reasonably open way. And in fact, they are doing better than ever at the moment on a global scale. China has companies that are protected by state subsidies.

If you are very blunt, China has a very strong government and a weak corporate sector. India has a weak government and a strong corporate sector. What's important then is a clear impression of the government. When we came in, people were nervous about elections, coalitions, how many politicians are being investigated for corruption and things like that. But the politicians we met understood the issues. The government itself said that whether it's the Congress party or BJP, don't worry too much.

We were reassured, but the concern really is more on the implementation and execution. So, even if you want to review the Mumbai and Delhi airports, is it going to take 3 years or 10 years? And it's not just a matter of time. Because all the time that this doesn't happen, other people are overtaking you. Your IT sector's English-speaking advantage will not last for very long, because all the Chinese are learning English very, very fast. That's why you need to get as far ahead as you can. There are no Chinese equivalents of Wipro or Infosys. TCS has an office in China with over 200 people. That's what should be happening. But since you delay infrastructure changes, it [still] takes an hour and a half to get from the Leela to Infosys's office. The traffic and the airport aren't the only important things; power and water are equally important...
...There is a concern that Indian infrastructure just doesn't support them and puts them at a great disadvantage to other countries. [However,] I don't think you want to go crazy and do what the Japanese have done - build roads for the sake of building roads. Even the Chinese have probably built too many highways and too many airports. And they've built them because constructing things creates employment opportunities. I'm not suggesting you do that.