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Over the last few years

my firm, Dezan Shira

& Associates, has been

i n v o l v e d i n C h i n a

a n d I n d i a a n d w e

have commented many times on the

relationship between them. I personally

have been involved in the bilateral trade

space through the mutually benecial

development of the rm into both marketssince 2005 we now possess, between the

two countries, some fteen ofces and a

team of several hundred staff.

As the relationship starts to look at

maturing to a more trade based focus,

the announcement by Chinese Premier

Wen Jiabao in December of an expected

increase in bilateral trade to US$100

billion in volume by 2015 has begun

to concentrate minds on how these

two giants of Asia are to manage theirdevelopment. Indeed, the China-India

issue is not just a regional matter, it is

one that will affect global trade balances

and security. If China and India succeed,

global growth is almost assured for the

remainder of the century. Hundreds of

millions will be lifted out of poverty.

Fail, and the fallout may spark serious

conict, possibly even nuclear. The stakes

may never have been higher in ensuring

that a dependable, secure and mutually

benecial relationship emerges.

In this comparison I try and examine thedifferences between the two nations, what

I see as the sticking points, and provide

clues as to why some of these may be

about to be removed to clear the path

for a more pragmatic, and commercial

minded relationship between the two

countries. That the relationship is highly

politicized is beyond doubt; matters

concerning especially the position of the

Dalai Lama and the Tibetan Government

in Exile, currently resident in India,

provide a case in point. China regards theregime as subversive, and consequently

uses this to push India towards its point

of view by making claims on Indian

territory and making border incursions

along disputed areas on a regular basis.

Indias military responds by requesting

budget increases along its territory with

China, delaying the construction of cross-

border highways that they suspect would

provide China with the opportunity to

just march in, and both use up resources

in addition to inhibiting development. For

a nation requiring massive infrastructure

development, such expense and deliberateregional suppression comes at a huge

opportunity price.

Chinas relationship with Pakistan too,

can be a thorn in Indias side a failed

state, responsible for attacks in Indias

major cities, with a habit of antagonizing

Indias huge Muslim population causes

both a continuation of mistrust, but also

deects Indian attention, nance, military

and resources towards its western border

and again prevents India from economicgrowth that could potentially challenge

Chinas bid for regional supremacy. Its

hardly any wonder that the two sides view

each other from polar opposites.

Introduction - MovingChina and India Forward

[ By Chris Devonshire-Ellis ]


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3

However, against this backdrop is the

increasing need to develop bi-lateral

trade ties. China needs a huge, export

consumer market to sell too, India

provides this. So does China for Indian

businesses. What is happening therefore

is a rebalancing of the relationship, to try

and move it away from border disputes to

a more settled and reliable trade platform.

Depending upon the future plans of the

Dalai Lama, who one suspects, is well

aware of the problems caused to the

Indian government in hosting him, it is

possible the next Dalai Lama and by this

I mean the Dharamsala appointed gure,

not the possible Beijing incarnation may

be found born externally from India.

Such a scenario would provide India

with a get-out clause in its relations with

China, and lead the government in exile to

establish its operations elsewhere. There

are precedents the fourth Dalai Lamawas born in Mongolia. It is not beyond

the bounds of imagination to perceive the

next incarnation being found there the

Mongolians relationship with China is

tetchy at the best of times, and Mongolia

is largely interdependent from Chinese

trade. That scenario mentioned, it is also

possible that the current Dalai Lama

could nd a way to agree with Beijing

to assume a reincarnation found in Tibet,

or China. Such issues require dialogue,

and are naturally highly sensitive. Onehopes such discussions are taking place,

at least informally. It would appear in

Beijings best interests not to preside

over a situation where two Dalai Lamas

are announced. That would only prolong

the conict for much of the remainder of

the century.

China-India trade developments for the

time being then are very much interwoven

with the future of the Dalai Lama. If his

government leaves India, Indian relationswith China will massively improve.

Both sides understand each other on this

point, and both are mature enough to

determine border dispute reminders not

withstanding that time will tell.

Beyond this also lies a strong desire to

reconnect old trade routes and border

regions. Bangladesh and Myanmar lie

between China and India, it is in the

interests of both to see these nations

become better equipped, more able to

participate in global trade, and open up

their lands to the exploiting of valuable

resources. That will take a regime change

in Myanmar, however China is also

becoming frustrated with the lack of

progress made in the country. It too wants

access to resources and an increase in

trade. Continuing to support the generals

indenitely while the potential for the

Burmese market in buying Chinese goods

remains in poverty is not a scenario

particularly appealing to Beijing. The

same can be said for Delhi.

Bangladesh meanwhile offers a port on

the Bay of Bengal for China, and access

to Indian markets as well as towards the

Middle East. Chittagong is already being

redeveloped with billions of dollars of

Chinese investment. Better relations with

India and Bangladesh also can reconnect

the Jute industry, and potentially revitalize

Calcutta. The city is already home to the

largest overseas diaspora of Tibetans,

and links back to Lhasa, if re-established,

could once again remake Lhasa into aregional Himalayan trading hub. The

purists may scoff, but Lhasa traditionally

had such a role. Reclaiming trade routes

from Calcutta and Dhaka to Lhasa would

also revitalize the Himalayan region. If

China and India are unencumbered in

political issues over the Himalayas, better

cooperation concerning water resources

and management may also result. It is

pertinent to note that while the Dalai Lama

calls for more focus on climate change in

Tibet, its his own removal that is morelikely to provide a platform for increased

regional cooperation of a resource

that needs to be properly managed,

tensions dispersed, and developed along

multilateral considerations.

Pakistan remains awkward, but again,

Chinese patience is wearing thin. The

export of terrorism to West China

alarms Beijing, as does another potential

market for Chinese goods remaining

in poverty. Peace is required, not justfor the redemption of Pakistan but to

also assist with the redevelopment of

Central Asia. What was once a cosy

relationship built in part to frustrate India

is now looking increasingly difcult to

maintain in its current form. China wants

markets in Pakistan, and Pakistan needs

infrastructure. The same is true of Central

Asia, and the huge markets to the west

in Iran. Securing such a vast territory

to allow Chinese businesses to operate

in them is becoming more of a pressing

concern than using Pakistan as a needle

to prickle Indian sensitivities and keep its

military occupied along its Western front.

I predict longer term changes in Chinas

expectations from Pakistan, although

this will undoubtedly take time in what

remains a fragile country.

While the current status between China

and India remains built upon political

differences, there are moves to reconstruct

this towards trade based foundations.

Sino-India trade during 2010 reached

US$60 billion, the same level it was at

before the global nancial crisis. US$60

billion is incidentally, the same trade

volume that China currently has with

Russia. Premier Wen, recently stated in

Delhi it should increase to US$100 billion

by 2015. Clearly, trade is developing

and becoming more important. Chinese

businesses are starting to move to India,

and Indian businesses are increasingly

moving to China. We know, as our

practice is positioned right in the middle

of that trade and we handle FDI into both

countries from either side.

My belief is that although the old disputes

and mistrust in relations is undoubtedly

there, both nations see a need to move

beyond this stalemate and recalibrate

their understandings. It is curious that

an elderly monk and a government of

Generals provide two of the keys that

will enable the rusty lock to bilateral

trade development be broken open.

As and when it is, that US$100 billion

will begin to look like small change.

The opportunities between the two are

enormous.

Chris Devonshire-Ellis is the founding

partner of Dezan Shira & Associates,

who special ize in foreign direct

investment, legal and tax advice in

China and India. The firm maintains

10 China offices (Beijing, Dalian,

Qingdao, Shanghai, Hangzhou, Ningbo,

Guangzhou, Zhongshang, Shenzhenand Hong Kong) and five in India

(Delhi, Calcutta, Mumbai, Bangalore

and Chennai). The practice may be

reached at [email protected].

Chris also contributes to our business

web sites India Brieng and the China-

India platform 2point6billion.

Note: The articles in this comparison

have previously appeared in our

2point6bill ion, China Brief ingand India Briefing websites and

publications, and may have been

amended from their original content.


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4 2point6billion.com

The Next 20 YearsChina and India are the two giants that will

rmly buttress the worlds economy in the

coming century. And as both countriesprepare themselves for a second wave of

growth in the aftermath of what has indeed

proven to be a difcult nancial crisis for

Asia, questions are now being asked as to

the extent of competition that India really

brings to global markets when measured

against China.

In some respects, the rise of India has

been greatly overshadowed by what

has happened in China over the past 20

years. If the development in China hadnot occurred, then it would be India that

would be considered the new darling

of global growth. To some extent, that

has enabled India to commence its own

growth curves without the media attention

that has been focused on China. In other

ways, however, there is little doubt that the

phenomenal growth of China has served

to spur India into action, and to nally

release the country from its moribund,

50 year hangover of independence from

Britain.

While China has largely dominated

headlines, India has begun to act. In

fact, over much of the past decade,

Indias growth patterns have mirrored

Chinas at an average of about 8 percent

annually until the nancial crisis hit, albeit

coming from a far smaller base. Currently

however, Indias share of global trade is

a little under 20 percent of Chinas total.

But with an economy about to break into

the global top 10 in terms of size Indiacurrently is in 12th position the global

community is both starting to take note

of Indias rise and to appreciate the clout;

as well as the opportunities such power

brings.

By 2030, India will have overtaken

China in terms of population, and almost

certainly in GDP growth rates. With

double the amount of available workforce,

a younger population and a consumer

economy of its own of about half a

billion people in its new middle class,

Indias tortoise against Chinas hare will

have caught up signicantly. When that

happens, the two countries will have

reached their rightful place as global

trading giants and regional partners andtruly usher in what will become the Asian

century of dynamism and growth.

Trading PartnersBilateral trade between India and China

has grown signicantly since 2005. Due

to the global economic downturn, trade

between the two countries declined in

2009. Interestingly, Chinese imports of

Indian goods fell 26.6 percent more than

Indian imports of Chinese goods. In fact,

this speaks to a broader problem with therelationship between the two countries.

In many ways, China seems to benet

China and India Compared

China vs. India 2010 Fast Facts

Item China India

Size of economy in global terms 3rd 12th

Global position in purchasingpower parity

2nd 4th

Global ranking among fastestgrowing economies

5th 2nd

Per capita income (US$) 3,180 1,032

World per capita income ranking 104th 139th

Number of workers (millions) 250 500

Population growth rate 0.63% 1.55%

Total population in global terms 21% 17.5%Percentage of global trade 8% 1.5%

Global trade (US$bn, 2008) 2,561 437

Length of coastline (km) 18,000 7,000

Amount of arable land(sq. km in millions)

0.64 1.45

Available fresh water area (sq. km) 3,720 314,400

Total rail track (km) 86,000 63,140

Total highway length (km in millions) 1.43 0.07

Total number of Englishspeakers (millions)

10 232

China vs. India 2030 Global Forecast

Item China India

Size of economy in global terms 2nd 4th

Global position in purchasing power parity 2nd 3rd

Global ranking among fastestgrowing economies

20th 12th

Per capita income (US$) 10,700 8,900

World per capita income ranking 80th 88th

Number of workers (millions) 175 600

Population growth rate 0.82% 1.01%

Total population in global terms 19% 21.5%

Percentage of global trade 8% 5.5%

Global trade (US$bn, 2008) 9,824 4,500

Total rail track (km) 200,000 130,000

Total highway length (km in millions) 1.8 0.9

Total number of Englishspeakers (millions)

10 250

(Data in these charts has been extrapolated from the following sources:U.S. Dept of Commerce, CIA, Free World Academy, Keystone, Photius,Legatum Institute. Please note data for 2030 is partially subjective,

although based on publicly available forecasts and is inherently proneto 20 years of potentially unforeseen circumstances)

Source: PRC Ministry of Commerce/China Brieng Analysis

Indian Trade Gap with China

India Trade Gap

Linear [India Trade Gap]

US$100million 50

0

-50

-100

-150

-200

-250

2005 2006 2007 2008 2009

2005 2006 2007 2008 2009

India Imports 89.35 145.82 240.16 315 296.67

China Imports 97.68 102.78 146.31 202.81 137.14

Percent Change India 50.80% 62.13% 64.70% 31.20% -5.80%

Percent Change China 27.20% 5.22% 42.30% 38.70% -32.40%

China/India Imports

China Imports India Imports Percent Change China Percent Change India

US$100million 350

300

250

200

150

100

50

0

Source: PRC Ministry of Commerce/China Brieng Analysis

80.00%

60.00%

40.00%

20.00%

0.00%

-20.00%

-40.00%


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52point6billion.com


more from trade with India. While in

2005 India enjoyed a trade surplus with

China, the situation ipped in 2006. Since

then, the trade gap has steadily grown

and if the current growth trend holds, the

Indian trade decit could reach US$20

billion this year. Furthermore, India

typically imports medium priced nished

products, while it exports raw materials.The inequality of trade has led to tension

as Indian manufacturers have a tough time

competing with cheap, Chinese produced

goods.

Trade in 2009 was down signicantly

from 2008 levels. However, the month to

month trend overall, from January 2009

to January 2010, has been increasing.

Interestingly, Indian imports of Chinese

goods are climbing at a higher rate than

Chinese imports of Indian goods.

Chinas Top 15Exports to India 2009

Aluminum

Electrical machinery

Fertilizers

Impregnated text fabrics

Inorganic chemicals and rare earth

Iron and steel

Iron and steel products

Machinery

Manmade lament, fabric

Minerals

Optic and medical instruments

Organic chemicals

Plastic

Silk; silk yarn and fabric

Vehicles

Chinas Top 15 Importsfrom India 2009

Articial owers and feathers

CopperCotton; yarn and fabric

Electrical machinery

Fish and seafood

Hides and skins

Inorganic chemicals and rare earth

Iron and steel

Machinery

Ores, slag, ash

Organic chemicals

Plastic

Precious stones and metals

Salt, surfur, earth, stoneTanning, dye, paint and putty

While trade has brought China and

India closer together, the two have pasts

riddled with disputes. In 1962, the two

nations fought a war over disputed border

territories, and to this day, Arunachal

Pradesh and a section of Kashmir remain

in dispute, though many international

sorganizations, including the Asian

Development Bank, support Indias

claims of sovereignty. Political tensions

frequently affect economic trade. India

has successfully appealed to the WTO on

several occasions to block the export of

Chinese products.

While it seems that for the time being

trade will continue to increase, a majordispute could severely disrupt their

economic relationship.

China Project Ofcesvs. India Project OfcesEstablishing project ofces (POs) in a

country is useful as they permit foreign

investment and participation in a specic

project, usually linked to a high value

contract that may take two or three years

to complete. They negate the need for theforeign participant to establish a more

permanent presence, as the PO is linked

to the contract completion terms, yet

provide exibility of hiring labor, funding

the project, and remitting prots overseas.

As China developed and required specic

skill sets to complete specic, usually

construction based projects, the China

PO enjoyed a relatively successful period

of popularity in the late 1990s and early

2000s. Recently they have fallen out

of favor, mainly as Chinese contractorsare now able to take the lions share of

construction work and do not need foreign

short term sub-contractors to assist, and

also because the Chinese themselves are

restricting their use. When discussing

the matter with authorities in Beijing,

it appeared no PO licenses have been

granted for a number of years, and that

applications would probably no longer

be approved.

Indian Imports from China/Chinese Importsfrom India Jan 2009 - Jan 2010 (US$)

India imports China imports

Jan-09 2.06 billion 861 million

Feb-09 1.75 billion 1.14 billion

Mar-09 2.22 billion 1.31 billion

Apr-09 2.39 billion 1.35 billion

May-09 2.35 billion 1.02 billion

Jun-09 2.26 billion 927 million

Jul-09 2.78 billion 979 million

Aug-09 2.69 billion 799 million

Sep-09 2.67 billion 1.42 billion

Oct-09 2.44 billion 935 million

Nov-09 2.78 billion 1.19 billion

Dec-09 3.29 billion 1.78 billion

Jan-10 2.81 billion 1.82 billionSource: PRC Ministry of Commerce

China Total Imports/Exports World (US$)

World imports World exports

2005 660.12 billion 761.99 billion


2007 955.82 billion 1.21 trillion2008 1.13 trillion 1.43 trillion

2009 1.01 trillion 1.2 trillion

Source: PRC Ministry of Commerce

Indian Imports from China/ChineseImports from India (US$)








China Total Imports/Exports Asia (US$)

Asia imports Asia exports







Jan 2009 Jan 2010

China Imports India Imports Linear [China Imports] Linear [India Imports]

US$100million

35

30

25

20

15

10

5

0

Jan-09

Mar-09

May-09

Sep-09

Jul-09

Nov-09

Jan-10

Mar-10


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This policy is in sharp contrast to India,

where the project ofce remains a viable

vehicle for foreign investors to participate

in infrastructure and construction related

projects tied for a limited period to a

specific contract. Foreign investors

planning to execute specic projects in

India can set up a temporary project site

ofce in India to handle the contract. TheReserve Bank of India provides approval

and grants general permission for foreign

entities to establish project ofces, subject

to certain conditions. These dictate that

the foreign investor has secured a contract

from an Indian company to execute a

project in India.

In addition, the project needs to adhere to

one of the following conditions:

The project is funded directly byinward remittance from abroad

The project is funded by a bilateral

or multilateral international nancing

agency

The project has been cleared by an

appropriate authority

A company or entity in India awarding

the contract has been granted term loan

by a public nancial institution or a

bank in India for the project

If the above criteria are not met, theforeign entity has to approach RBI to

obtain approval.

In terms of remittances, authorized Indian

banks can permit intermittent remittances

by the PO pending the winding up or

completion of the project provided they

are satised with the legitimacy of the

transaction, subject to the following:

The PO submits an auditors or chartered

accountants certicate to the effect thatsufcient provisions have been made to

meet other liabilities in India including

income tax

An undertaking from the PO that the

remittance will not, in any way, affect

the completion of the project in India

and that any shortfall of funds for

meeting any liability in India will be

met by inward remittance from abroad

Any inter-project transfer of funds requires

prior permission of the pertinent regionalofce of the RBI under whose jurisdiction

the PO is situated.

In the nancial circumstances described

above, readers familiar with China based

transactions involving foreign currency

should note the Reserve Bank of India in

such circumstances fullls much the same

role as Chinas State Administration of

Foreign Exchange.

Under these c i rcumstances , i t i sapparent that in order to take advantage

of, and participate in, Indias massive

reconstruction projects, foreign investors

may well nd the Indian project ofce

a suitable vehicle to use as it affords

relatively easy market entry and exit upon

project completion. This contrasts greatly

with China, where the project ofce is

now largely seen as having had its day.

China FICE vs. IndiaBranch OfcesThere are some fundamental legal

structural differences between Chinas

foreign-invested commercial enterprises

and Indias branch offices (BO), not

least amongst them being that Indian

BOs are not independent legal entities,

whereas China FICEs are. However, in

terms of use, both fulll pretty much the

same criteria for foreign investors: they

permit the import and export of goods,

can buy and sell goods, can trade or offerconsulting services, and can remit prots

back overseas. Branch ofces differ in that

they are still considered part of a foreign

entity based overseas, and are not limited

liability companies. Foreign-invested

commercial enterprises are independent,

limited liability companies. Accordingly,

BOs do not require capitalization whereas

FICEs do.

A downside of the India BO is the high

level of income tax 41.86 percent againstIndias norm of 33.99 percent and the

standard income tax rate of 25 percent

in China.

Other differences exist in terms of FICEs

and BOs engaged in the service industries.

Branch ofces do not attract turnover tax,

which China does levy on FICEs involved

in the service industry at a monthly rate

of 5 percent. Service industry BOs are

subject to service tax against invoice

value at a rate of 10.3 percent. For tradinghowever, the applicable tax burden is

VAT, which in China is 17 percent and

in India is 12.5 percent. Though it may

not be possible to reclaim all VAT upon

export in China, whereas in India VAT

can be reclaimed in full upon export. The

advantage of the BO over the FICE is the

ease of establishing and exiting it as an

entity. For this reason it may make sense

to set up a BO despite the initial higher

income tax burden to test the Indianmarket without having to commit to major

capitalization costs in India. For longer

term trading and manufacturing, a private

limited company incorporation would be

more suitable.

China WFOE vs.India Private LimitedCompaniesChinas wholly foreign-owned enterprise

(WFOE) has become the investment

vehicle of choice for the internationalinvestor wanting to manufacture, service

or trade in China. In addition to the

WFOEs expansive business scope, its

unrivaled popularity arises from multiple

other factors, including 100 percent

foreign ownership and control, security

of technology and intellectual property

rights, a self-developed internal structure,

the insertion of existing company culture,

and ability to sell to Chinas domestic

market, and the ability to repatriate prots.

In this regard, Indias private limitedcompanies (IPLC) are the same animal,

with the exception that whereas China has

a specic set of regulatory considerations

for Sino-foreign joint ventures, an IPLC

can also be an Indo-foreign JV, and both

100 percent foreign-owned IPLCs and

IPLC JVs are governed by the same

regulations. For the purposes of this

analysis, we shall concentrate on the 100

percent foreign-owned IPLC. The need

for such a company to have either 100

percent foreign ownership or whether itrequires an Indian investor is dependent,

in a similar fashion to China, upon the

Foreign Invested CommercialEnterprises vs. Branch Ofces

Requirement China India

Limited liability company Yes No

Minimum capital investment US$4,420 N/A

Industr y restrictions Can only sell whatis purchased

Retail

Income tax 25% 41.86%VAT 17% 12.5%

Average gross hourly pay US$3 US$1.20

Employee welfare(% of salary)

45-50% 10.3%


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scope of the businesss intended activities.

The intended scope of business activities

in India needs to be studied rst to assess

the suitability of the business as being a

100 percent foreign-owned entity.

On the assumption that the scope

of activities does not require Indian

investment, then an IPLC may beestablished with 100 percent foreign

ownership in India. This is known as the

automatic route and does not require

additional approvals.

Unlike China, application procedures

for 100 percent foreign ownership

of IPLC may sometimes fall into a

second category, which does require

specic approval from Indias Foreign

Investment Promotion Board (FIPB).

These categories are identified by theReserve Bank of India, and comprise two

lists concerning approval required (List

A), and limited eligibility (List B) that

affect foreign investment in India. All

items and activities that are not mentioned

in List A and List B are eligible for foreign

investment under the automatic route up

to 100 percent. Items in List A require

approval from the FIPB. List B prescribes

the limits on the foreign investments for

which automatic approval will be granted

by RBI, subject to certain restrictions.The lists are quite specic and generally

do not cover standard manufacturing or

trading which are usually applicable under

the automatic route. Most India investors

entering the market to manufacture, trade

and sell standard products will not fall into

either List A or B restrictions.

Similar to the China WFOE, an IPLC

requires a minimum of two directors,

and has from two to 50 shareholders with

limited liability related to the amountof paid up capital. Both directors and

shareholders can be other legal entities. As

is the case in China, the amount of paid

up capital required should be a nancial

exercise to determine the businesss start

up and cash ow needs.

Interestingly, when all taxes are considered,

in terms of repatriating prots from India,

the IPLC is more tax efcient than the

China WFOE. Although Indian prots

tax is higher, it does not levy a tax onprots repatriated overseas, which China

does impose. The additional costs of labor

welfare are also considerably more in

China, making the IPLC more nancially

viable than its Chinese counterpart,

something to mull over if considering one

market over the other.

China vs. India

CorporateIncome TaxesBoth China and India have fairly well

developed tax structures, both with the

authority to levy taxes divided betweenthe central and regional governments.

Both countries are going through an

extended period of tax reform at present,

and India especially as it seeks to pass

legislation to update its tax base for the

rst time in 50 years. Top amongst these

changes is likely to be the introduction of

a goods and services tax (GST) at varying

rates amongst internal purchase and

sales, although 100 percent refund upon

export is expected. The GST is expected

to amount to 16 percent of invoice value.This system is expected to partially

replace VAT is some states, although in

others it will be a new introduction. VAT

is not uniformly applied by all states in

India. For certain sin goods, such as

tobacco and petrol, VAT may be applied

on top of GST. This system is expected to

be rolled out during 2011, however may

be subject to further delay.

India however does score better in the

application of VAT (and future GST)refunds against exports. China levies a

tiered system of VAT refunds against

exports, and in some sectors, such as

garments, does not permit refunds at

all. India however permits VAT refunds

against all categories of goods and

services upon export. It should be noted

that China does not currently levy VAT on

services, while India does.

In terms of corporate taxes, applicable

rates are as follows:

Tax incentivesWith China unifying its tax base in 2008,

it did away with preferential tax incentives

largely available to foreign investors, andespecially those in free trade zones and

special economic zones. China now tends

to levy or provide refunds against a variety

of taxes depending upon industry. In doing

so the Chinese central government tries to

manage balances between domestic sales

of certain products and exports of certain

products, and varies these from time to

time or as circumstances dictate. China

is still very much a centrally planned

economy. Specic tax incentives therefore

are usually applicable in certain industriesonly, occasionally regionally based,

and typically involve a manipulation of

business tax, prots tax or VAT.

India on the other hand wishes to develop

its special economic zones and free trade

zones, and accordingly provides highly

attractive tax incentives to do so. These

can include 100 percent corporate income

tax breaks for up to 10 years. These can

be applicable to certain development

projects to be carried out in India, mainlywithin infrastructure. Incentives also

exist for businesses involved in 100

percent export of products manufactured

in an Indian SEZ or FTZ. These are

typically 100 percent for the rst ve

years of protability, and 50 percent for

an additional ve years, although there

are regional and eligibility variations.

Nevertheless, the boom in manufacturing

that China enjoyed with the tax incentives

it used to offer in its development zones

are now being recreated in India, and thisshould spur foreign investors familiar

with the China model to consider India

Wholly Foreign Owned Enterprisesvs. Private Limited Companies

Requirement China India

Limited liability Yes Yes

Minimum capital investment Industry specic US$2,500

Regulatory status One tier Two tier

Income tax 25% 33.99%

VAT 17% 12.5%

Prots repatriation tax 10% Nil

Tax China India

Corporate income tax 25% 30.9% to 42.23%

Education surcharge Nil 2% to3%

Business (turnover) tax 5% Nil

Wealth tax Nil 1% (if t/o aboveUS$32,600)

Dividend tax tooverseas parent

10% 14%

Transaction-based taxes China India

VAT 17% 12.5%

GST Nil 16%

Withholding taxeson royalties chargefrom overseas

0-45%dependingon service,

average 20%

10-40% dependingif permanent

establishment isin India or not

Note: While every eort has been made to ensure accuracy of tax data,readers are asked to bear in mind that in both cases, regional variationsoccur and that the tax regimes in both countries are evolving rapidly.Te gures above are as a general guideline only, and may be subjectto change. Accurate and industry specic tax data should be obtaineddirectly from professional advisers.


8/25



as an alternative manufacturing base, as

these incentives provide a clear impetus

for doing so.

It should be noted that China engages a

calendar year audit cycle, January 1 to

December 31. India uses the scal period

from April 1 to March 31.

China vs. India:Commercial RealEstate RentalsFor the purposes of this study, we used

New York as a benchmark to help compare

China with India. Apartment rentals were

based on buildings built no earlier than

1980 which an apartment seeker would

expect to pay in each of these cities. We

have identied only the medium range

level in this inclusion.

There is not a huge difference between

China and India, although the China

property market is more speculative,

somewhat erratic in movement and prone

to regular bubbles. Rentals in Mumbaiare increasing and are expected to do

so signicantly while demand outstrips

supply for the next three to ve years.

SummaryFrom the g loba l manufac tu r ing

perspective, China and India now offer

similar, yet also differing opportunities.

Chinas main thrust of its development

is now creating equality of wealth within

its borders, and to do this it needs to both

improve upon some of the infrastructure,

education and housing options and

facilities that are currently available in

its rural areas. Chinas growth will come

increasingly from the rural population a

total of some 600 million people and it

is this sector that the government wishes

to develop into becoming a consumer

class. Todays opportunities for China

are largely about being able to service

this sector.

China is also moving up the value

chain and wants to move away from

its traditional low cost, export driven

manufacturing base. In doing so,

opportunities exist in adding value

research and development, innovation

and design are all going to be developing

services that China increasingly needs.

China is changing towards more

sophistication in adding value, together

with increased opportunities in the sale of

goods and services to its domestic market.

For India, this is also partially true.

Indians are receptive to internationalbrands and a wealthy middle class, with

English widely spoken, has huge and

yet still untapped potential for global

manufacturers looking for sales overseas.

This is true of everything from auto

components to fashion, and in this aspect

the two countries share similarities in

their major urban markets. India has also

taken up the mantle, recently discarded by

China, of offering cheap manufacturing.

As China has wound down its free trade

zones and special economic zones for thepurposes of export manufacturing, India

has ramped its up. China has become too

dependent upon export manufacturing to

the detriment of its overall economy, while

India does not have enough manufacturing

capability and is too dependent upon

services. It is these realignments that

are creating the opportunities. Indias

provision of tax breaks of 10 years are an

opportunity for growth and protability

in overseas markets that should not be

wasted.

Accordingly, India may now be considered

as a viable and serious destination for

export driven manufacturing to markets

abroad. While the world recovers from

the global nancial crisis and Western

demand remains weak, that may seem

somewhat optimistic. Businesses still

need to achieve growth, and as Asia starts

to post impressive results in earnings and

the ability for its population to become

consumers, so manufacturing in Indiato service these markets becomes more

realistic.

In truth, the China vs. India debate is

a no-brainer. Its neither one, nor the

other, and although some cross over in

capabilities will undoubtedly emerge, it

is quite apparent to the author at least,

that global strategy, in terms of getting

growth onto balance sheets of parent

companies elsewhere, must now embrace

China and India as two unique, butcomplimentary destinations to achieve

dynamism and prot capabilities for the

next two decades.

India is now more competitive than China

overall for labor intensive industries, a

reduction of income tax to 30 percent

(China: 25 percent) during 2011 will

trigger a spurt of foreign investment.

Also of note are Indias lower mandatory

welfare payments to employees - an

average of 10 percent against Chinas 50percent. These developments will increase

Indian competitiveness over China in

certain industries.

Apartment rents: Furnished four bed, medium range(US$ per month)

New York 8,330

Shanghai 1,430

Mumbai 1,070

Beijing 1,050

Delhi 930

Apartment rents: Unfurnished three bed, medium range(US$ per month)

New York 5,200

Shanghai 1,230

Beijing 760

Mumbai 720

Delhi 470

Apartment rents: Normal, local rent, medium range(US$ per month)

New York 3,100Shanghai 770

Beijing 600

Mumbai 480

Delhi 370

Doi ngBusine ssinIndia

China India

Business Resources

China Brieng India Brieng China Business Guides India Business Guides

Available at

www.asiabriengmedia.com/store


9/25

92point6billion.com

Ch i n a s r a p i d l y a g i n g

p o p u l a t i o n i s s e t t o

dramatically shrink its

workforce and effectively

pass the baton to India as

the worlds manufacturing hub, according

to analysis from Morgan Stanley and the

Global Times. Chinas one child policy,

which has seen it manage its population

over the past three decades, is now nally

kicking into the work pool and reducingthe number of Chinese workers.

The Global Times says, 2015 will mark

the beginning of the end of Chinas

demographic dividend. The World Bank

also echoes those sentiments, predicting

that Chinas GDP growth will fall to 7.7

percent in 2015 and to 6.7 percent by

2020. Morgan Stanley expects Indias

growth to head in the opposite direction

and to surpass Chinas growth two years

from now. Personally, I suspect that whenspeculation and manipulation is stripped

out of Chinas current GDP growth rates,

Indias economy is already growing at a

faster pace than Chinas.

Chinas aging workforce is already

having an impact on the nature of

conducting business in the country. It

was in recognition of this that China

strengthened its labor laws two years ago,

making it more difcult for employers

to lay off aging staff without having topay signicant compensation, based on

years of service, for loss of employment.

That move effectively made employers

nancially responsible for at least part

of the nations pension requirements.

China will possess 200 million people

above 60 years in 2015, and workers

coming to retirement age are expected to

add an unprecedented 10 million retirees

per annum to that gure. That loss of

workforce is already starting to make

China more expensive, and this trendwill continue. India, however, is poised to

provide the vast bulk of the global labor

pool. By 2020, the average Indian will be

29, while the average Chinese will be 37.

The data has interesting repercussions.

China is becoming aconsumer market to sell

to rather than a globalmanufacturing hub

This is often quoted as the dynamic that

will maintain China as a major destination

for foreign direct investment. While this is

true, the nature of selling to China is still

wrapped in many problems, especially for

overseas investors. The China market is

prone to protectionist measures, and with

the Chinese government itself still a major

shareholder in many Chinese state-owned

enterprises, foreign investors will havean increasingly tough time competing

with them. Additionally, selling to China

requires a profound knowledge of Chinese

culture and tastes. Then theres the

stranglehold that China has on much of

its domestic logistics industry. Selling

to China is ne, but it is a path fraught

with difculties. The successful foreign

investor will have deep pockets and a

sound Chinese joint venture partner to

help them. The domestic expertise and

finesse to assist sales of products tothe Chinese consumer will invariably

require Chinese local expertise. Brands

well-known globally will have to adapt

marketing, positioning and even recipes

to t the Chinese model. As I pointed

out two months ago, white goods need to

become red.

Indias infrastructurewoes have becomeits opportunity

The most common complaint about Indiais its infrastructure, which coupled with

a generally moribund economy for 40

years after independence, and some quite

extreme weather conditions, has meant a

lack of investment in virtually everything.

That is already changing, as airports are

xed, bridges spanning oceans are built,

and city subway networks are opened.

For contractors, architects and engineers

who made good in China, India is the new

opportunity. A staggering US$500 billion

is being spent in the next three years inIndia, and foreign businesses involved in

any aspect of infrastructure development

are scrambling to get into the market.

Global sourcingis relocatingChina will still maintain various sectors

for sourcing in which it has specific

expertise, and of course there is still

its domestic market to service. But the

sheer weight of economics makes India

the future tiger of global procurement.

Wages are significantly lower than in

China, and our recent Asian Comparator

survey of wage levels and related costs

in China, India and other Asian countries

consistently showed India as excellent

value for money in the labor pool. Sure

there are comments about quality and that

infrastructure bugbear again, but China

went through the same issues twenty years

ago. Made in China was a poor brand

in the 1980s. Indias infrastructure is not

as bad as is made out either, and the cost

savings are there to be had. Relocating

China DemographicsDictate India as GlobalManufacturing Hub


10/25


China Demographics Dictate India as Global Manufacturing Hub

a business from China to India is also,

from the legal, operational and nancial

perspective, rather easier than is generally

considered, as our report earlier this

month demonstrates. China meanwhile,

continues to become more expensive, as

the Communist China Price re-establishes

a policy of charging foreign investors

more.

I took the matter up over the weekend with

a number of expatriate CEOs working in

India. Crucially, they had also spent time

in China a minimum of ve years each,

and some up to ten running businesses

and foreign invested enterprises. Now

they were in India and all working

with signicant businesses with global

turnovers in the tens of millions to billions

of dollars. When it came down to it, they

said, China was easier to do business inthan India. China was better at organizing

big projects, and the labor pool was

disciplined and productive in ways that

India was not. However, when it came to

the smaller details, India was far easier to

live in than China. Cultural differences,

languages, and more acceptance by

Indians than Chinese of their overseas

background and experience all made

them feel more comfortable in India than

in China. However, although India wasmore difcult at rst base to do business

in than China, the feeling was that was

the precise reason they all had MBAs and

years of management experience they

were being paid to solve such problems,

and therefore it was just part of the

job. Asked whether they would prefer

to live in India or China (Mumbai was

regularly compared with Shanghai) the

surprising conclusion was that India was

preferable. Several executives expressed

a desire never to return to China. Theconclusion therefore is simple: India

is more awkward than China when

implementing large projects. But it is

not insurmountable, and I am well paid

precisely to solve such issues.

Clearly, the attitudes are changing, along

with the demographics. China may huff

and puff and posture all it wants, but

as it becomes increasingly belligerent

towards its neighbors, more expensive,and apparently quite willing to blame

foreigners for taking all the money out of

the country in response to its economic

woes, it is progressively becoming less

tolerant of foreign investment. India is

the reverse. China cannot, for once, turn

back the tide that its long-standing one

child policy has now revealed, and it is

akin to being King Canute to suggest it

will. Chinas demographic advantages

are coming to an accelerating end, and

it is India that is set to take up the slack.

Its always nice when a subject you

have rsthand and long standing

involvement in finally makes

the mainstream media, and so it

proved in November with The

Economists cover story stipulating how

Indias growth will outpace that of China.Weve been pointing this out for some

time and regularly over the past few

years on our 2point6billion.com and India

Brieng sites.

The Economists articles essentially state

what weve already said, that India will

soon start to outpace China thanks to a

young and growing workforce. It also goes

on to point out that Indias much-derided

democracy is finally proving fruitful

rather than a hindrance, and attributes

Indias surprising economic miracle as

largely due to its private sector.

The countrys state may be weak, but

its private companies are strong, the

magazine said. Thats very true, and is a

major part of where China and India, and

the quality of senior management and

innovation, differ.

While the vast majority of Chinas

largest companies are state-owned and

subsidized, a matter that is leading to

calls of unfair competition from the EU

in particular, the vast majority of Indias

businesses are private sector run and

managed and have to generate their own

income to survive and prosper. That is

leading to a growing difference in decision

making and executive talent within

the two countries, and while Chinese

executives are hitting a glass ceiling due

to political considerations and government

involvement, Indian executives are not.

In short, Chinese executives are being

denied the right to develop talents as

entrepreneurs within Chinas largest

companies. I do not believe that to be a

healthy system of management training

and development.

But why does this matter to China-based

businesses? Why are we discussing this

on China Brieng?

Well first, lets go back to what The

Economist had to say and had observed.

They sa id that , despi te the poor

headlines generated in the run up to the

Commonwealth Games, India is doing

rather well, and its economy is expected

to expand by 8.5 percent this year. It has

a long way to go before it is as rich as

China (the Chinese economy is four times

bigger), but its growth rate could overtake

Ahead of the Curve Indias Growth to Outpace Chinas


11/25

112point6billion.com

Ahead of the Curve Indias Growth to Outpace Chinas

Chinas by 2013, if not before. Some

economists think India will grow faster

than any other large country over the next

25 years. Rapid growth in a country of 1.2

billion people is exciting, to put it mildly.

The Economist is right. It is exciting.

Although Chinas economy is four times

larger than Indias, it is also the second

largest in the world. India tends to getovershadowed by all the China hyperbole.

India is, in its own right, the worlds

eleventh largest economy (nominal GDP)

and the fourth by purchasing power

parity. With predictions for that to grow

at 10 percent per annum for the next two

decades, the opportunities to succeed

in India, just as China slows down, are

overwhelming. It is also important to note

that while much is made of the Chinese

and their savings, they lag behind India.

India has the highest savings rate in theworld at 36 percent.

Much was made in the media also about

the Commonwealth Games, and the shit

and crap that preceded it, but we can

note the games are proceeding nicely now,

once a few heads got knocked together,

and also once a few never been to India

before media hacks started to realize that

no, India is not like London or Silicon

Valley, and that one has to adjust. Stupid,

yet widely publicized comments of Delhibeing a cesspool are just totally wide of

the mark. In fact the city, built by Edwin

Lutyens, was designed to show off the

splendors of the British Empire and was

built with large boulevards to rival Paris,

magnicent buildings, and was greened

with trees from all over the empire.

Visitors familiar with it will know what I

am talking about.

The Games are a one off, and nothing

really to do with China. What is to do

with China though, and The Economist

echoed our own earlier words, was that

they noted Chinas workforce will

shortly start ageing; in a few years time,

it will start shrinking. India, meanwhile,

is now blessed with a young and growing

workforce. Its dependency ratio the

proportion of children and old people to

working-age adults is one of the best

in the world and will remain so for a

generation. Indias economy will benet

from this demographic dividend, which

has powered many of Asias economic

miracles.

The second reason for optimism is

Indias much-derided democracy, The

Economist continued, noting that Indian

capitalism is driven by millions of

entrepreneurs all furiously doing their

own thing. Since the early 1990s, when

India dismantled the license raja and

opened up to foreign trade, Indian business

has boomed. Ideas ow easily aroundIndia since it lacks Chinas culture of

secrecy and censorship. That, plus Chinas

rampant piracy, is why knowledge-based

industries such as software love India but

shun China. Given the choice between

doing business in China or India, most

foreign investors would probably pick

China, according The Economist, but

as the global economy becomes more

knowledge-intensive, Indias advantage

will grow.

Picking China is an issue that is related

to a familiarity with the country and also

the fact that in international news, the

country is main stream in ways that India

is not. It wasnt so long ago when I was

just starting Dezan Shira & Associates that

I was advised by a successful Australian

businessman, who had been educated at

Peking University in the late 1980s, notto go to China. The reasons: Its horrible,

dirty, and communist. Another highly

prominent Hong Kong businessman told

me bluntly that the Chinese will steal

your money. Yet that didnt stop me,

and the more I learned the more I grew to

adapt, belong, and begin to make progress.

I hear similar stories about India today:

Its dirty, Its bureaucratic, Theres

no infrastructure. They are all partially

true, but as I write I am having to devotea considerable additional amount of

my time and financial investment in

our firms India practice just to keep

up with business demand. Being dirty,

administrative, or having to deal with a

lack of infrastructure are not very good

excuses for not wanting to do something

creative. Its hardly an entrepreneurial

attitude, and the China guys who bang on

about that as a difference, well they have

their own choice to protect I guess anddont want to admit to an alternative. In

short, lazy consultants and lawyers grown

too fat on the milk of China. Yet make

no mistake India is arriving, and it is

impacting upon China, big time.

India matters to China businesses because

it represents a second opportunity that

has arisen. It is unprecedented in modern

times for effectively 2.6 billion people

(the combined size of the China and

Indian populations, and hence the namefor our web site dealing with the bilateral

development issues) to walk into the

global economy in the space of about 25

years. The opportunities are staggering.

India matters for China businesses because

if you are not in India, you dont have an

alternative to offer your clients. India

matters because its a global economy, and

not a Chinese one. India matters because

it has a wealthy and growing middle class

of 200 million. India matters becauseit provides a secondary stream of very

potent revenues. India matters because

you can hedge your bets against anything

going wrong in China.

India matters because, ultimately, being in

China is not going to be enough in order

to provide service, cost comparisons,

alternatives, and market understandings,

analysis and the dynamics of change that

India will and is already bringing to China

and the Global economy. Ive been saying

it now for the past ve years. Now The

Economist has just put it on their front

cover. That doesnt make it any more

true, but it should act as a trigger for

more China-focused executives to get

out, research the potential, get over to

India, and start to nd out what and where

the opportunities for their businesses

are. Doing business in India is about to

become a global mainstream dynamic.


12/25


Inte res t in the China - Ind iacomparison has begun in earnest,

and its not something that is going

to disappear. While eyes have been

on China for much of this year over

currency issues, we nish 2010 with a

U.S. presidential visit but to India, where

Barack Obama visited in November 2010.

Inevitable China-India distinctions are

going to be made, and you can bet that of

these, a greater understanding of India,

rather than China will follow.

I recognized the issues between the

two countries several years ago, and

am regularly asked why Id decided to

develop my practice out of China and into

India. The reasons were as follows:

Personal developmentAt the time we already had seven ofces

in China (now increased to 10) and, as

head of the business, it alarmed me that I

wasnt personally nding the opening of

a new ofce in China so much of a thrill.Thats bad news for a COO, and indicative

that I needed to go nd a new challenge to

keep me occupied or leave the business.

CompatibilityI had a look at smaller regional markets

such as Singapore, Mongolia, and even

North Korea. However, when it came

down to it, I gured that we really knew

the following:

1. We werent intimidated by hugecountries

2. We understood the implications and

demographics behind a huge population

3. We understand and make a living from

emerging economies and countries

with rapidly evolving investment laws,

taxes and regulatory environments.

When we understood what we were

and what we knew, the only compatible

choice for us to expand into out of China

was India.

HedgingI also felt that continuously investing inChina, effectively putting all of our eggs

in one basket, could prove to be a strategic

mistake if anything drastic went wrong in

China. If, for whatever reason, investment

into China slows, then I need to have an

alternative market to take up the strain and

even protect us if things get really bad.

OpportunityI researched the India market for two

years before we decided to incorporate.Operating originally from virtual ofces

in ve locations, and with a very skeleton

staff, I traveled the country all over

trying to feel India and to get the pulse.

Commuting between China and India is

hard work, and I still had China issues to

look after in the running of the business.

But the more I was there, the more it made

sense. We incorporated fully in 2007, and

upgraded virtual ofces to fully staffed

facilities that year when we decided to

make the investment permanent. It wasmade on the basis of government reforms,

the size of the market, the changing

demographics in China, and that gut

feeling that it was the right thing to do.

Now, we are set to initiate another tranche

of investment into India and have recently

expanded our operations in both Mumbai

and Delhi and recruited several more

staff. From 2011, our India operations

are expected to be self funding and are

expected to provide dividends from 2012.

I have successfully divested energiesfrom China and into India with protable

results. And at the end of the day, thats

what business is all about.

That doesnt mean that we are not bullish

on China. We also opened a new ofce in

Qingdao in mid 2010. However, China is

changing, as is India, and it is the latter

changes that will be faster and require

more attention than the China ones for the

next three years. China is set on its course.

India is about to see massive winds ofinvestment blow through. Why? The size

of the consumer market, which is larger

than Chinas, arguably more wealthy, and

certainly more committed to spending,

and its regulatory reforms (two examples,

India is reducing its corporate income tax

rate from 45 percent to 30 percent early

next year, while the top rate for individual

income tax will be lowered to 30 percent

as against Chinas top rate of 45 percent).

So there Ive covered the whys and

wherefores and the processes. But

what are Indian cities really like when

compared with China? Lets make some

comparisons:

Rural land just one hour outside Mumbai

Shanghai vs. MumbaiThe main issue with Shanghai is that it

gets referred to a great deal as Chinas

nancial center. If so, it seriously lags

behind Mumbai, and has for 20 years.

Just during the past decade, 2000-2010,

Mumbais Sensex has climbed 545.2

percent against the Shanghai Composites

151.3 percent. Put simply, for every dollar

youd have earned in Shanghai, youd

have earned 3.6 in Mumbai. Mumbai isstreets ahead of Shanghai in its nancial

maturity, profitability, and ability to

deliver dividends to shareholders. J.P.

Morgan, among others, also think so.

Fortunately for Shanghai, its bluster over

being a nancial center is in fact overrun

by more practical considerations. It is

the second largest port in terms of TEUs

shipped in the world, behind Singapore,

while Mumbai lies in 24th place. Mumbai

is also being upgraded signicantly, so

expect to see that as a top 10 highest

volume seaport within the next 10 years.

Its also true to say that the service markets

Chinas Indian City Equivalentsand the Reasons for Going


13/25


Chinas Indian City Equivalents and the Reasons for Going

are different. Shanghai is a major port

from which to reach the West coast of

the United States, and markets elsewhere

in Southeast Asia and Australiasia. For

Mumbai, the markets of the Middle East

and East Africa dominate, and Europe

will progress once the global economy

straightens itself out and the United

States and European Union generatesome growth. But for the time being, they

are non-competitive, and dealing with

different emerging markets of their own.

In terms of growth, Shanghai can only try

and compete with Singapore. Mumbai is

where the growth and development will

be.

Pavilion inside Delhis red fort, Old Delhi

Beijing vs. DelhiBoth capital cities, both recently having

hosted major sporting events we

compared the Beijing Olympics withthe Delhi Commonwealth Games here.

Surprisingly, its New Delhi that is the

prettier of the two cities. Built by Edward

Lutyens to show off the imperial grandeur

of the empire, he really went to town. It

would be possible to contrast Old Delhi,

that medieval maze of back alleys and

rickshaws and bustle and hustle with

Beijings old hutongs, but the Beijing

city government knocked most of them

down. In truth, thats what should happen

to most of Old Delhi. But for both, its the

seat of government, although the nearby

city of Gurgaon is going to become

more on the map as investors pour in. It

already possesses the third highest GDP

in the country. While youll be familiarwith Tianjin Gurgaon is the Indian

equivalent.

Rice cultivation in Chennai

Shenzhen vs. ChennaiShenzhen epitomizes new China, built

from scratch and now a city of 8 million,

and the fourth largest port by TEU globally.

Supported by Hong Kong and Taiwanese

investors, its grown from just being

where their local manufacturing industries

moved to, to being a port servicing global

supply. Chennai, however, is catching up.With a similar, slightly larger population

of 8.5 million, it is located on Indias

southeast coast, and has a slightly different

demographic (its basically just across the

ocean from Thailand). Its ability to also

service the United States and Southeast

Asia will make it a competitor over

time with Shenzhen. Currently the 91st

largest port globally, it is home to billion

dollar investments by BMW, Nokia,

IBM and HP, attracting a similar type

of investment portfolio to Shenzhen.

Roughly 60 percent of Indias auto exports

go through Chennai, making it far more

auto and IT focused than the residual low

tech industries that Shenzhen is currently

trying to divest itself from.

Comparisons of course can go on and

on, and these above are only meant

as snapshots rather than complete

demographic examinations (but email

us if you require such information). Ive

also provided some more rural than city

photos to push home the point that India

is not always about bustling cities and

hordes of people. It remains, just as China

does, largely a rural society, although

this is changing as education is improvedand, as is also the case with China, more

people migrate to the cities. Finally, please

nd a breakdown of Indian imports from

China, and Chinese imports from India. As

bilateral trade and competition grows, the

comparisons will keep coming.

Indian Imports from China/Chinese Importsfrom India Jan 2009 - Jan 2010 (US$)


Jan-09 2.06 billion 861 million

Feb-09 1.75 billion 1.14 billion

Mar-09 2.22 billion 1.31 billion

Apr-09 2.39 billion 1.35 billionMay-09 2.35 billion 1.02 billion

Jun-09 2.26 billion 927 million

Jul-09 2.78 billion 979 million

Aug-09 2.69 billion 799 million

Sep-09 2.67 billion 1.42 billion

Oct-09 2.44 billion 935 million

Nov-09 2.78 billion 1.19 billion

Dec-09 3.29 billion 1.78 billion

Jan-10 2.81 billion 1.82 billion


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14/25


China has taken most of

the headlines as a result

of its sensational growth

over the past two decades,

leaving India somewhat in

the shade. Yet surprisingly, it is India that

has provided better protability over the

past decade. Indeed, Michael Cembalest,

chief investment ofcer at J.P. Morgan

Private Banking, has placed his clients

trust rmly on Indian equities and not

Chinese.

In his well-read Eye on the Market

newsletter, sent to the banks high net

worth individuals, he noted that since

China began its market reforms, India has

in fact well outperformed China. During

2010, Indias equity market has provided

investors with a return of 22 percent while

Shenzhen, South Chinas bourse in the

booming city next to Hong Kong, has

actually shrunk by 3 percent.

Over the past 10 years, Indias Mumbai

Sensex has risen 545.2 percent compared

to a rise of just 151.3 percent on Chinas

Shanghai Composite.

Of the 13 managers on Cembalests

platform who invest in emerging or Asian

equities, 10 are overweight on India, a

winning strategy for 2010, he says, given

Indias out performance versus most

developed and developing equity markets.

In his newsletter, Cembalest outlines the

reasons:

India provides better

corporate protabilityProt margins compare favorably with

other developed and developing countries.

Companies in India are more exposed to

market forces than in China, which may

explain the superior margin results.

Indias equity capitalmarkets are moredeveloped than ChinaIndia ranks in the top 10 globally in equity

market issuance, with three times the

number of public companies as China.

There is greater exposure to the private

sector as 75 percent of the investable

market cap in India are private companies,

compared to 18 percent in China.

In short, Cembalest is saying that Chinese

companies are protected by the state

and that the implied lack of market

forces create a situation where both state

interference and a lack of competition

are in fact making Chinese companies

less protable and entrepreneurial than

Indian ones.

There is also a difference in funding

90 percent of available bank funding in

China goes to state-owned enterprises,

while in India that 90 percent goes to

privately held businesses. It makes it far

harder for Chinese companies to compete

at an executive level with their Indian

counterparts, even with the benet of state

funding and involvement. Simply put,

Indian businessmen are more capable thanChinese businessmen in making money,

and being able to share that through

dividends.

While it remains harder to operate in

India than China at present, the country is

very much on an upward trajectory, and

the results speak for themselves. Chinas

massive state involvement in its own stock

markets is hindering the development and

protability of their businesses. When

India really starts to kick in with itstax reforms next year, the gap between

Indian protability and Chinas in their

respective stock market performances and

funds may grow even wider.

Mumbai StockExchange OutperformsShanghaiMumbai may be on the way to overtaking

Shanghai as a nancial hub in the coming

years based on data which shows that theBombay Stock Exchanges main index

signicantly outperformed the Shanghai

Stock Exchanges main index in terms of

growth in the past decade.

The Bombay Stock Exchange (BSE)

Sensex grew by 249 percent over the

last 10 years, while the Shanghai Stock

Exchange (SSE) Composite Index

managed 140 percent growth. This is

more remarkable given the Shanghai

market has the advantage of a fixed

population access; Chinese nationals can

only invest in the Shanghai or Shenzhen

exchanges and require special permission

to acquire stocks from overseas. Indians

meanwhile are free to invest where they

choose, however increasing amounts

of foreign capital and returning Indian

investment are now owing back to India

(the Shanghai Stock Exchange places

limitations on foreign investment with a

only 79 foreign institutions currently able

to buy and sell A (locally priced) shares).

Another inuence to the Chinese market

has been increases often caused by

government liquidity due to the stimulus

plan. Speculations on bubbles are rampant

when it comes to Chinas indexes, again

a feature Indias exchange does not tend

to have. Government interference in the

Mumbai market is far more limited.

The BSE traces its roots back to 1830,

with its primary trading index, the Sensex,

being first compiled in 1986 with a

base level of 100. The BSE is now the

largest exchange in South Asia and the

12th largest globally with an estimated

market capitalization of US$1.03 trillion

in June 2009. There are over 4,o00 listed

companies on the exchange. In contrast,

the SSE was only reformed in 1990 and

lists some 900 companies. It is the sixth

largest exchange in the world with a

market capitalization of US$2.07 trillion,

but is dominated by government-owned

companies and is not fully open to foreign

investors. Shanghais primary index, the

SSE Composite IX was formed in 1991

with a base value of 100.

How India Has OutperformedChina Protability


15/25


Factories must either relocateelsewhere in Asia or remodel tosell to ChinaThe trade processing industry in China,

traditionally concentrated in the Pearl

River Delta region, is becoming extinct,

and businesses urgently need to reinvent

their business models, according to

Thomas Chan, the director of Hong Kong

Polytechnic University.

Chan, who is also the head of the China

Business Center, made his comments in the

South China Morning Post in November.

Much of Chinas trade processing is

invested in by Hong Kong and Taiwanese

factories. Stating that China had lost its

long term, low cost advantages in labor,

land and a low RMB exchange rate, Chan

identied higher prices in raw materials,

coupled with a reluctance by U.S. and

European retailers to accept higher

prices as sounding the death knell for the

industry.

Trade processing factories will be forced

out of business within the next 12 months

unless they change their business models

and either migrate their work to other

production bases such as Bangladesh,

Cambodia, India or Vietnam, or change

their China business model to sell to the

booming domestic market, Chan said.

The Chinese government also sees the

trade processing industry as undesirable

as it deems it outdated, and wants to

shift the economy to a service based

consumer driven model. Trade processing

is typically labor intensive, energy

wasteful, environmentally poor, and

produces exports mainly by processing

cheap imported materials. China wants

to develop an added value economy and

become innovative rather than rely on

processing trade.

Such business will flow instead into

the emerging economies in Asia, and

especially those that can provide low cost

labor and land, and that have less stringent

environmental and labor laws. Guangdong

Province alone is home to some 38,000

factories involved in the industry. Adding

that many factory owners do not want

to face the facts, Chan said that many

factories would cease being nancially

viable. Meanwhile, attempts by trade

processing factories to relocate within

China have largely been unsuccessful due

to rapidly rising labor and land costs in

other inland provinces.

Hong Kong-based Li & Fung, the worlds

largest sourcing and trade processing

business, now sources and processes an

increasing volume of its garments from

elsewhere in Asia as it seeks to depend less

on China for such activities. Matters to be

aware of in trade processing are the costs:

LaborChina is committed to doubling the

national minimum wage within the next

ve years, meaning an average 20 percent

increase per annum on a national basis

until 2015.

Commodities pricesThese remain volatile and, in the case of

cotton, subject to price spikes. However

markets such as India are able to actively

compete with China in terms of volume,

delivery timescales, quality and nishing.

Global Financial CrisisA potential second round nancial crisis,

and one that may seriously affect China,

is now more likely following the United

States pumping US$600 billion into the

markets last month. That will keep the

RMB high against the dollar and increases

the cost of Chinese export manufacturing.

That being said, all is not doom and

gloom. Mentioning that China would

enter a golden age and a domestic

consumption revolution, Chan indicated

that China based trade processing

factories should look at supplying the

domestic market instead, and capitalize

on the national policy to boost domestic

expenditure. This was echoed by Morgan

Stanley Chief Economist Wang Qing

who stated that he expected Chinas total

consumption to reach two-thirds that of

the United States, or 12 percent of the

global total, within the next decade.

We are seeing a trend of nearly all LLJG

operations (licensed foreign investment

entities sub-contracted to Chinese

factories, and unique to South China)

now converting to WFOEs to allow them

to sell to the Chinese domestic market. It

is a growing trend and one that is rapidly

increasing, said Alberto Vettoretti,

managing partner in China for Dezan

Shira & Associates based in Shenzhen.

Our firm has an increasing number

of China-based clients now expanding

their operations into India and Vietnam

while they also restructure their China

operations. The trade processing industry

is moving away from China to Southeast

Asia, while China operations are

restructuring to focus on domestic sales.

Investors in the trade processing industry

must act now to rethink their business

model and either relocate their trade

processing elements elsewhere, refocus

on the China domestic market, or both. If

they do not, they will face serious nancial

difculties in the form of increased costs

within the next two years if they continue

to concentrate purely on China based

export trade processing.

Export Trade Processing inChina To Become Extinct


16/25


Indianizing Your Existing BusinessThe Business Environment

As China begins to slow

down, and the global

supply chain shifts, India

has just recorded GDP

growth of 9 percent for

the past quarter meaning it has overtaken

China in terms of production. It is a trend

that is likely to remain. As China-based

businesses also start to gear up for the

development of Chinas domestic market,

and look to the hinterlands for growth,

others are also eying the India market.

Exporting a business into another country

is never easy, and this is especially so inthe case of China and India. The countries

have different administrative systems and

do not necessarily agree to international

conventions surrounding territories and

descriptions. Then there are the immense

language and written language issues. If

these are not recognized, embarrassment

and even criminal action can follow.

As my practice Dezan Shira & Associates

has found out, care needs to be paid

when replanting a subsidiary root of abusiness from one country to another.

Not all systems or points of reference are

the same. Dezan Shira & Associates rst

moved to establish operations in India

four years ago (after 14 years extant only

in China) and we found many surprising

cases where what we thought we knew

from a cultural perspective needed a

rethink, and additional work and attention

to new cultural detail. This article is

designed to explain some of the practical

differences in styles the China-basedexecutive may meet when asked to look

at India.

The Business

EnvironmentA more demanding large projectenvironmentIndia isnt up to China standards when it

comes to the development and execution

of large-scale projects. Administrative

delays, worker discipline and, above

all, the interference of local politics can

interfere with planning and execution.

Problems, including the notorious

infrastructure issues, need to be worked

with and solutions found. Innovation

and an ability to think outside the box

are needed in India, whereas in China

theyve tended to make the administration

far easier. However, there are signs that

China is not what is was increases in

labor unrest, strikes (previously unheard

of), and especially protectionism are

growing in China. As was mentioned to

me in Mumbai recently Im paid to sort

these problems out, and thats what my

MBA program was for. Is India morebig project awkward than China? Yes. Is

it solvable? Also yes.

A more welcoming socia lenvironmentWhile China is a generally friendly

and welcoming place to be, for the

small infrastructure it falls down when

dealing with foreigners, and there are

still barriers. Getting tickets, going out

to Chinese events, finding out whats

happening online, reading internationalnews, social networking, keeping in touch

internationally with family and friends

over the internet these are all awkward

or have infrastructure banned in China.

While one can get used to not having

Facebook in China, if youre used to it

overseas its a major hassle. India has

both free media and social networking,

and its usage of the English language just

makes the social element of being in India

that much more pleasant. Plus, if youre

Japanese, Indians dont have endlessspats over wartime related events and

territorial disputes over 60 years old that

frequently mar the Japanese population in

China. Neither, apart from Pakistan and

China, does India have territorial disputes

with anyone else. China is currently in

disputes with India, Vietnam, Japan,

Taiwan, and several other nations over the

Spratly Islands, is threatening potential

economic sanctions with Norway after

the Nobel Peace prize was awarded to a

Chinese reformist, and has a history ofencouraging its nationals to harass citizens

of other nations when things go wrong

such as throwing stones at the U.S. and

British embassies over the NATO incident

in Belgrade. China is more antagonistic,

is quite prepared to occasionally indulge

in harassment of foreign nationals, while

Indians tend to argue among themselves

rather than with foreigners.

Senior managementIn China over the past 20 years, local

management has had to be educated and

developed to international standards

to fulfill to the exacting standards of

running an international business. Itemssuch as FCPA, SOX and other regulatory

aspects creep in, and to many Chinese

managers, these are still a bridge too far

when added in to corporate culture and

language issues. Twenty years ago, there

were very few Chinese managers with

any global experience, and today the

number is still relatively small. Even the

Chinese government has had to embark

on a program of sending its top ofcials

overseas on university courses. The

upshot is that international managementoperating a business in China in most

cases still has to take an active role in

the daily operations of the business. In

India, graduates and executives have long

been educated overseas and are highly

familiar with international standards.

Indeed, many non-resident Indians are

highly sought after by Indian companies

back home as they seek to upgrade their

domestic enterprises. With a profound

knowledge of Indian culture, language

capabilities, an overseas education andmanagerial experience, Indian executives

tend to be far more advanced globally than

their Chinese counterparts who tend to hit

a glass ceiling. It means that an Indian

manager running your Indian opera

Documents

China-India Comparison 0