I have just returned from a visit to India and I visited China last autumn. I was struck by the difference between the two societies. In China I found an almost total absence of religious belief while in India I discovered an almost nationwide attachment to different religions and traditional mysticism. While I saw "tomorrow" all over China in the form of futuristic cities like Shanghai and Hong Kong, I only saw "yesterday 's poverty and superstition" in India. David and you harp on the importance of governance. I heard many Chinese persons state that as long as their material well-being improves, they are prepared to accept the absence of democracy because this enables the government to take action without vested interests standing in its way. In India democratic discussion was said by the persons I met to be an obstacle to rapid and firm decision-taking. What is your opinion on this?

Eoin Treacy's view

Thank you for sharing your impressions from China and India following your travels. You are not the first subscriber to have asked this question. There have been a number of people over the years who, having visited China and India, said that on coming home they sold their India positions and transferred the balance to China.

It is easy to be impressed by Chinese efficiency in infrastructure development. When one visits Shanghai, Beijing, Shenzhen or any of the other tier 1 cities one could be forgiven for thinking how can China still be an emerging market? China has built a domestic digital economy through protectionism and copycatting that rivals the efficiency of the global technology mega-caps and that is an incredible achievement.

However, I heard someone say once that for every 100 kilometres you get from a tier 1 city, you go back 10 years in time. In my experience that is accurate. The vast majority of development has occurred along the coastal periphery while the inner hinterland is still underdeveloped and is likely to always stay at a relative discount to the coastal cities in much the same manner as other countries.  

China’s administration is doubling down on crowd control. Everything from artificial intelligence to phone tracking and cameras are being deployed to exert a degree of control over the population unheard of in human history. The Party is reversing corporate independence so that companies are rapidly becoming organs of government control.

Shouldn’t we be asking why that is when the majority of people are willing to play along with authoritarianism? The answer as far as I am concerned is simply enough. History is replete with examples of how fragile authoritarian regimes are. They appear unshakable one year, only to disappear the next. China’s property market has been expanding for decades. The economy has been expanding for decades and debt levels are rising. There is no country is history has had uninterrupted growth. What will happen in China when we get that interruption? The Communist Party is fully aware of that which is why they are acting now to secure control. If one is a long-term investor the only conclusion is that China now deserves a higher risk premium than it did a year ago.

India is chaotic and crowded. With a third of China’s land mass, India has a larger population there is a cacophony of competing objectives for the nation’s myriad ethnic minorities; each with its own language religion and traditions. India has always had a dynamic domestic economy and with English as a first or second language for most people, it has had few obstacles to engaging with the global economy. India’s sclerotic bureaucracy and deep-seated corruption, where bribes are integral to the functioning of the system tends to put people off investing and the historic volatility of the Rupee reflected the mismanagement of the economy. India does not have the infrastructure China boasts and progress there are significant obstacles to achieving that status.  

However, let’s think about it in another way. Standards of governance are vitally important for an international investor for the simple reason that once you invest it would be nice to know that your money will still be there when you come back to get it. Minority shareholder rights are vital so that vested interests cannot overwhelm our smaller shareholdings. You need an independent judiciary if you are going to have minority shareholder rights upheld. A free press is vital if the worst temptations of power are to be contained by outing improprieties in public.

David pioneered the term Governance is Everything decades ago. If we apply these filters to India and China we are drawn to an interesting conclusion. After all China has none of these three characteristics of improving standards of governance while India has all three, so does governance mean anything? If we look at history, democracies are messy and prone to crises, but they promote a sense of people striving for a common good and are therefore inherently more stable over the long term.

The JPMorgan India Trust and the China Fund Inc both started in the early 1990s and both are US Dollar denominated so by comparing their performance we have a reasonable basis for a total return comparison. India has outperformed by a considerable margin over that time frame, and that is despite the currency devaluation over the same period. The true value of appraising a market from a standards of governance perspective is exhibited when you realise that China had a lower GDP per capita than India in 1990 and now it is a multiple of India’s. However, GDP growth does not transfer into broad stock market gains without standards of governance improving.

My point here is not to derail anyone from investing in China but rather to highlight that the market is far from risk free.