Finding investment opportunities in China and India - easier said than done

Despite China’s “age trap”, the economic race between it and India is more complex than any one factor. Finding investment opportunities requires more complex analysis, according to Betty Ng.

In Aesop’s fable “The hare and the tortoise,” the predictable race between two animals took on a dramatic turn when the hare’s complacency lost to the tortoise’s persistence.

Some people have used this analogy to forecast the economic race between China and India.

Although China and India both belong to the much-hyped group of BRIC countries, China’s economic growth surpassed India’s in the past decade, and gross domestic product (GDP) per capita also registered higher levels.

China is now the second largest economy in the world, up from 6th place at the start of the millennium, while India has moved from 12th to 10th place over the same period.

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Some critics, however, have argued that the economic race between the two countries will take on a different turn in the next few decades, as the “demographics dividend” puts India at an increasing advantage.

Just how much credence is there in this notion and will the healthy competition between the two emerging nations end up like Aesop’s fable?

Will China fall behind India due to the “age trap”?

China and India currently have estimated populations of 1.34 billion and 1.2 billion respectively, similar in terms of the absolute level but the “starting points” are very different. In terms of distribution, China’s largest age group falls in the 40-59 years old category, while India’s falls in the 0-14 years-old category.

In a few decades, China’s population pyramid will therefore become inverted, or top-heavy, with fewer young people supporting an elderly populace.

India, on the other hand, will continue to enjoy a bottom-heavy pyramid with a younger, vibrant population providing a large workforce to support economic growth.

Because of China’s “age trap” some people argue that the growth rates between the two emerging nations will narrow, that India may even surpass China in a few decades.

While the statistics are quite compelling, the argument seems to exaggerate a single factor’s importance in the complex process of growth.

If a nation’s economic trajectory hinges primarily on age distribution, perhaps Africa and the Near East, with their younger population, would have even more potential.

It is easy to argue, using the case of Japan, that an aging populace dampens economic progression, though it is easier to show how it exacerbates a slowdown than to prove how it directly causes it.

Clearly not all “young” countries are equal and not all young countries are necessarily emerging markets, even if some correlation exists between “young” and “emerging”.

Indian population: younger but less literate

Although India’s population is younger, it is less educated than China’s. The literacy rate – people aged 15 and over who can read and write – is 92 per cent in China and only 61 per cent in India.

The difference between the two countries no doubt stems partly from the gender gap. In China the literacy rate is 96 per cent for men and 88.5 per cent for women.

In India the numbers are 73.4 per cent and 47.8 per cent respectively. Of course, education alone is a necessary but not sufficient condition to power productivity growth.

The forecasting firm Global Demographics, for example, has found that China’s GDP per worker falls below that of many other countries with similar literacy rates. So clearly both China and India have to catch up, albeit on different fronts.

Although education alone cannot ensure productivity growth, it is critical because it affects a worker’s propensity for employment: the more educated a worker, the higher the likelihood he/she finds work.

For this reason India’s education gap between men and women affects the female participation rate in the workforce.

China’s employment propensity for working age women is 71 per cent but the number is only 39 per cent in India. (The numbers for men are 83 per cent and 75 per cent respectively.)

So having a younger population may not mean a larger workforce if lower education obstructs employment prospects for women.

This in turn can have repercussions on consumption growth: the consulting firm BCG projects China’s female economy to grow from $1.3 trillion in 2010 to $4 trillion in 2020, while India’s will reach a smaller $900 billion.

India’s gender gap may affect size of workforce

India is making progress to catch up on education. Global Demographics projects the country’s literacy rate to climb from 65 per cent to 81 per cent by 2032, even if it remains lower than China’s current 92 per cent.

For men, this will translate into a participation rate of 79 per cent for China and 75 per cent for India.

For women, the participation rates will be 68 per cent for China and 40 per cent for India. So despite progress on education, the gender gap is likely to remain more pronounced for the South Asian titan.

Simply based on propensity to be employed, China currently has the narrowest gender gap (12 per cent) among Asians, just better than “Affluent Asia” (13 per cent) comprising the former tiger cubs – Hong Kong, Singapore, South Korea, and Taiwan.

At 36 per cent, however, India does only better than South Asia as a whole (57 per cent).

Even though India has elected a female prime minister (Indira Gandhi) in addition to a female president (Pratibha Patil), female upward mobility remains confined to women in affluent and elite circles.

In China, on the other hand, there are more female professional women rising to middle or senior management positions.

Age distribution alone cannot forecast growth difference

All these arguments on the literacy and the gender gap do not refute the importance of age distribution.

They simply suggest that the economic race between China and India is a complex one that may not be easy to forecast based on one single factor.

Both countries have their unique advantages and growth depends on a complex group of variables. Just as economic growth alone cannot determine investment returns, demographic analysis based solely on age distribution is inadequate to forecast productivity or GDP growth, let alone earnings change.

The economic race between China and India is not a simple hare and tortoise competition, and looking for investment returns in these two countries requires more complex analysis.

Betty Ng is the director and investment commentator at Fidelity Worldwide Investment.