The underlying economic factors reveal why China and India, two of the largest markets in Asia, may offer long term potential for growth in the future.

Let us start with a summary of the industry weighting of the stock exchange indexes as reported in Table 1 below before reviewing details of each market in the following sections.

China

In 2009, gross domestic product in China amounted to U.S.$4.9 trillion and represented 8 percent¹ of the world economy and hence it ranked just after Japan as the third largest economy in the world. China has made significant developments in the manufacturing and industrial sectors from the economic reform efforts that started two decades ago. The economic growth statistics over the past five years are summarized in Table 2 below.²

Substantial development is also reported by the financial industry in China. The 2009 study commissioned by City of London on the competitiveness ranking of 75 global financial centres³ – high ranking was attained by four cities in China and its region. These include Hong Kong SAR ranked at the top 3rd, Shenzhen at top 9th, Shanghai at 11th, and Beijing at top 15th ranking.

Certain investment constraints to foreign investors include exchange control and other business support requirements. Nevertheless, it is important to note that in June 2010, the central bank of China had outlined their strategic vision of implementing the international use of Reminbi (“RMB” or “yuan”), the Chinese currency, for investment and trade settlement⁴.

Currently, investment in China can be made through H-share listings on the Hong Kong Stock Exchange and American depository receipts of listed Chinese stocks. For fixed income, there are opportunities in “dim sum” RmB denominated bonds issued in offshore markets. Also, there are equity and bond investment funds available as managed by the Chinese government approved Qualified Foreign Institutional Investor managers (“QFII”) commencing 2003.

India

In 2009, gross domestic product of India amounted to U.S.$1.3 trillion and represented 2 percent² of the world economy. India ranked after Canada as the 11th largest economy in the world. Table 2 in the previous section outlines the spectacular growth rate achieved by India in the past five years. Accomplishments at the Indian manufacturing sector were reported in a number of economic reports and publications including the launching of the Nano, a small size sedan, in 2008 on a low budget. It was reported that the Indian automobile industry was the 9th largest in the world, reaching a production of 2.3 million units in 2010. The advanced development in the information technology and health care sectors in India were also highlighted.

Foreign institutional investors registered with the Securities & Exchange Board of India (“SEBI”) and foreign individual investors are eligible to purchase equities and convertible debentures issued by India companies under the Portfolio Investment Scheme⁵ Investment can be made through American Depository Receipts of listed Indian companies, funds administered by AD Category – I bank (Authorized dealer “AD”) with authorization from the Reserve Bank of India.

There are a lot of investment opportunities in these two large economies with substantial domestic demand. In closing, the World Bank statistics on GDP per capita shown in Table 3 below demonstrate their development potential to attain and surpass the world average in the years ahead.

Other References:
1. Regional Economic Outlook: Asia and Pacific, International Monetary Fund publications, World Economics and Financial Surveys, Oct, 2010.
2. Chindia: how China and India are revolutionizing global business, Pete Engardio, McGraw Hills, Oct 23, 2006
3. India Today, April 12, 2010, article on Healthcare Boom
4. India Today, March 15, 2010, article on Jobs are Back
5. The elephant and the dragon: the rise of India and China and what it means for all of us’, Robyn Meredith, Aug 2007

Footnotes:
¹ World Bank, GDP in current U.S.$. In 2009, Canada GDP is U.S.$1.3 trillion and U.S. GDP is U.S.$14.256 trillion and Japan GDP is US$5 trillion.
² World Bank 2009 statistics
³ Global Financial Centers – 7’, the 7th biannual study commissioned and published by the City of London from Z/Yen Group Ltd since March 15, 2007. In the first study in March 2007, out of the 46 top financial centers included in the study, Hong Kong SAR was 3rd, Shanghai was 24th and Beijing was at 36^th ranking.
⁴ Bloomberg News: (i) June 24, 2010: Yanhap News: China allows cross-border yuan settlement in more cities, (ii) Dec
⁵ 2010 Xinhua: China expands cross-border yuan trade settlement trial.
⁶‘Master circular on foreign investment in India’, Reserve Bank of India, master circular No. 2/2009-10, July 2009