Smooth sailing for big change agents

Growth in China and India continues to expand, with positive implications for the global economy. The two countries figure among the five that account for nearly half of the world's gross domestic product (GDP) as measured by buying power in US dollars, says a new World Bank report. The others on the list are the United States, Japan and Germany.

Attracting FIIs

Two of the fastest growing economies in the world, China and India are a huge hit with investors. Their robust economic growth has made them favored destinations for foreign institutional investors (FIIs).

By late 2007, India had attracted private equity (PE) investments of $10 billion, the highest among the emerging economies, including China. According to India-focused cross-border advisory firm IndusView, China attracted $8.3 billion during the same period.

In 2006, China received $13 billion in PE investments compared to India's $7 billion, while in 2005, India had attracted only $2 billion as private equity. The figures prove that India has taken a firm lead in PE investments.

When it comes to initial public offerings (IPOs), the Chinese have large affairs. While the Chinese markets have multi-billion listings, India can boast of having the most diverse stocks on offer.

With the market capitalization of Indian companies crossing $1.6 trillion within a couple of months of crossing the magical $1 trillion mark, and with a vibrant equity derivatives segment to boot, the Indian stock markets look much more attractive in terms of depth. The equity derivatives market in China came into existence only recently and is yet to gather momentum.

FDI pouring in

China and India are throwing up competition for economies like the Hong Kong special administrative region, the Republic of Korea, Singapore and Taiwan province, as the main locations for foreign direct investment (FDI) in developing Asia.

The share of India and China in total global FDI outflows has also risen. While both accounted for 10 percent of total FDI outflows in the Asian region in 2005, it increased to 25 percent in 2007.

India has emerged as the second most attractive location after China, ahead of the United States and Russia, for global FDI in 2007, according to UNCTAD's world investment report. Brazil is fifth on the list.

The 2007 Foreign Direct Investment Confidence Index by AT Kearney also ranks China and India first and second in FDI. China leads the index rankings for the fifth consecutive year and is the first choice of Asian investors, 34 percent of whom plan to invest there over the next three years. India retains second place in the index, a position it has held since displacing the United States in 2005.

Information technology

IT spending in India is set to grow the fastest in the world in 2008, says global research firm IDC. As the information & communications technology market in Asia-Pacific reaches $154 billion in 2008, IDC says India and China will contribute half the total IT spending in the region by next year.

The Asia-Pacific region (excluding Japan) is likely to register a growth rate of 10 percent in 2008, and India and China will be the drivers of this growth, as their GDPs are forecasted to expand by between 9 and 10 percent during the year.

In both countries, growth will be led by small & medium businesses, which are increasingly adopting more IT solutions as a strategic business differentiator. Moreover, government spending is increasing as technologies to bridge the digital divide are deployed.

Bilateral trade

India-China bilateral trade touched $37 billion in 2007, surpassing the $20 billion target for 2008 a year in advance.

The two countries target trade worth $40 billion by 2010 - a feat that might be achieved long before the target date.

Exports from India to China include cotton, organic chemicals, iron, steel and inorganic chemicals; imports from China are highest in the category of electrical machinery and equipment, nuclear reactors and related machinery, organic chemicals, mineral fuels, and oil and oil products.

According to India's Export Import Bank data, the country's cotton exports to China rose from $514 million in 2005-06 to $750 million in 2006-07. Exports of organic chemicals rose from $460 million to $518 million while that of inorganic chemicals and organic or inorganic precious metal compounds went from $328 million to $351 million.

China's exports to India in electrical machinery and equipment rose from $2,773 million in 2005-06 to $4,241 million in 2006-07, nuclear reactors and machinery increased from $2,162 million to $3,249 million and organic chemical exports jumped from $1,310 million to $ 1,709 million.

Both India and China have become the focus of global economic activities. For instance, the second Asia financial services M&A survey by PricewaterhouseCoopers (PwC) has forecasted that China and India will account for 86 percent of mergers and acquisitions (M&As) in the financial services sector in the next five years. While the growth rate of M&As in India increased from 36 percent in 2005 to 39 percent in 2007, China's M&As in financial services came down from 52 percent in 2005 to 47 percent in 2007.

India, popularly known as the world's back office for IT and BPO (Business Process Outsourcing) services, is all set to also emerge as the world's backyard for manufacturing in the next 3-5 years, says a report by global consulting, technology and outsourcing services major Capgemini.

The Indian Government is eager to attract foreign manufacturing activities, but it will need to make significant investments to harvest this potential, Capgemini added.

Indian investment in China, currently at $130 million, exceeds the latter's investments in India, which the Chinese put at $47 million.

Contract projects

Tata Consultancy Services (TCS), India's largest software exporter, has clinched a $200 million deal spread over five years to provide technology solutions for Bank of China.

Binani Cement plans to invest $100 million in Chinese cement company Shandong Rong'an Group, which has a 400,000-ton per annum capacity.

In May 2007, 10 Indian companies, ranging from consumer durables and electronics to telecom and even industrial development corporations of two state governments, signed MOUs worth $5 billion toward establishing manufacturing units in China.

The Chinese intend to reciprocate by procuring more Indian iron ore and by setting up steel plants in India, according to the Chinese industry body China Council for the Promotion of International Trade (CCPIT).

Further, more than 100 Chinese pharmaceutical manufacturers have lined up major India expansion plans via joint ventures, strategic alliances, research collaborations and wholly owned subsidiaries.

CLP Holdings, Hong Kong's biggest power utility, intends to build a $125 million wind farm in India in association with Enercon (India) to tap the rising energy demand there.

Chinese telecommunications equipment maker Huawei plans to invest $100 million to consolidate all its development centers into a single facility in India.

This unprecedented simultaneous growth in two of the world's largest countries is expected to boost demand in the global economy and open up massive market opportunities for trading partners, especially neighboring Asian economies.

As Bill Gates, co-founder of Microsoft, the world's largest software company, summed up for the students of the University of California at Berkeley "China and India are the big change agents for the years ahead."

Indian Brand Equity Foundation

(China Daily 01/14/2008 page13)