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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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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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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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China and India Compared
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$)
World imports World exports
2005 660.12 billion 761.99 billion
2006 791.61 billion 969.07 billion
2007 955.82 billion 1.21 trillion2008 1.13 trillion 1.43 trillion
2009 1.01 trillion 1.2 trillion
Source: PRC Ministry of Commerce
Indian Imports from China/ChineseImports from India (US$)
India imports China imports
2005 8.94 billion 9.77 billion
2006 14.58 billion 10.28 billion
2007 24.02 billion 14.63 billion
2008 31.5 billion 20.28 billion
2009 29.67 billion 13.71 billion
Source: PRC Ministry of Commerce
China Total Imports/Exports Asia (US$)
Asia imports Asia exports
2005 271.45 billion 199.67 billion
2006 318.8 billion 244.69 billion
2007 378.54 billion 307.56 billion
2008 702.66 billion 663.3 billion
2009 603.45 billion 568.6 billion
Source: PRC Ministry of Commerce
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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China and India Compared
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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China and India Compared
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.
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China and India Compared
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
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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
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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
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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.
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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
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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$)
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 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
Source: PRC Ministry of Commerce
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ASIABRIEFINGEmployment Overheads
in Chinas Social Security System
Establishing Manufacturing
Operations in India
Managing Human Resources
in Vietnam
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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.
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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.
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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