India Or China? The One Fund You Must Consider

By Dr. Mark Skousen
Chairman, Investment U

Dear Investment U Reader,

Recently, I've visited both China and India. They have two things in common: enormous populations and the highest growth rates among developing countries (China 9%, India 8%).

So, which country will give investors the best return on their money in the next 10 years? The answer may surprise you...

China's Success Story Can Be Deceiving

On the surface, China appears to be the better choice. It dominates India in almost every macroeconomic indicator. Both countries are growing at breakneck speed, but China embarked on its economic reforms in 1979, 13 years earlier than India, and thus now enjoys a per capita income ($1,600) twice that of India.

China is an investment giant, with foreign reserves approaching $1 trillion. It produces more steel, highways, and skyscrapers faster than India can build slums. It is the undisputed leader in attracting foreign investment, at least 5 to 1 over India. Exports and imports represent more than 50% of GDP. And China is not just export-oriented...

With the average import duty cut in half to 6% today, Chinese consumers are buying everything Western they can get their hands on.

But when you dig deeper into the statistics, China faces serious problems. Among them is the fact that China's dependence on foreign investment is largely due to the country's failed banking and capital markets at home - 70% of the government-owned banks there are essentially bankrupt, with massive bad debts.

The stock market collapsed four years ago and has yet to recover. Meanwhile, the Chinese continue to save like squirrels, and are either loaning more to weak government banks or investing in the real-estate boom. (We visited a condo development in Beijing with units selling for up to $1 million each.) This is causing a real estate bubble in China that could collapse after the 2008 Olympics.

In many ways, China's growth machine is a mirage. Like Stalinist Russia, President Wu and his communist leaders are mobilizing capital, labor and raw materials that give it the appearance of growth, yet offer little in real productivity gains. Yes, China is building like gangbusters, but at what price? Massive and forcible seizures of land, the destruction of usable housing structures, reduction of arable land, and environmental degradation.

India, On the Other Hand...

Related Articles at InvestmentU.com Red Capitalist Report # 1 -- You Won't Believe What I Saw in Shanghai! Investment Opportunities in India...Why Go With India Over China: Part 1 India's Economy - Why Go With India Over China: Part 2 Comment On This Issue in the Investment U Forum

The macroeconomics support China, but the microeconomics favor India, especially in terms of competitiveness, productivity and efficient use of capital.

India has many advantages, most notably a well-educated, English-speaking population in the world's largest stable democracy (in stark contrast to China's authoritarian regime).

India is ideal for the service industry, as evidenced by the growing number of Western companies outsourcing in India and taking advantage of new and trainable workers. India does not have a one-child policy, which has quickly made China's workforce old. India has 450 million people under the age of 20, compared to 400 million in China. American universities enroll 80,000 Indian students, compared to 62,000 Chinese.

China is largely dependent on foreign partners to get things done, while India is developing a wave of homegrown, innovative private companies, especially in high tech. China does not want to encourage pure China-based private enterprise, for fear it will stimulate dissent.

There is growing anxiety over political stability in China. Last year, there were 75,000 protests. India has its political problems, too, but as Hugo Restall, editor of Far Eastern Economic Review, states, "India has worked through dissent rather than sweeping it under the carpet."

Finally, the stock market is performing far better in India than China, and that speaks volumes. The index of the Shanghai Stock Exchange has declined by 50% since 2001, while the India stock market has risen 50%. (See the chart below.)

Why has India risen so sharply while Chinese stocks have floundered? According to Business Week, the average Indian firm posted a 16.7% return on capital versus 12.8% in China. Clearly, Indian companies are earning more value on their capital.

I'm betting on India. Although there is no Exchange-Traded Fund (ETF) for India yet, due to capital controls, the best way to invest is the India Fund (NYSE: IFN).