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China and India

Shifting Trends, Outsized Potential

Executive Summary
Despite the impact of the recession on the global economy, China and India
continue to develop as emerging market superpowers, avoiding many of the
negatives that have plagued other countries during the same time period.
Peter Soo
Managing Director, Head of Asia
ex-Japan Equities, Hong Kong
Elizabeth Soon, CFA
Managing Director, Portfolio
Manager, Asia ex-Japan Equities,
Hong Kong
Kheng-Lai Tan
Managing Director, Portfolio
Manager, Asia ex-Japan Equities,
Singapore
Natasha Smirnova
Senior Analyst, Emerging Markets
Fixed Income, London
Andressa Tezine
Vice President, Senior Research
Analyst, Emerging Markets Fixed
Income, London

These two BRIC nations — sometimes referred in the same breath as “Chindia” —
have managed to achieve consistent, uncorrelated growth based on dramatically
different governments, cultures and economic strengths.
This paper examines how both nations differ by outlook and opportunity set, and
their changing prospects for future cooperation and conflict as each pursues
its individual and joint path to economic progress. Based on this continuing
convergence, the European Central Bank (ECB) refers to China and India as
“The Twin Titans for the New Millennium.”1
In examining their current trajectories, as well as each country’s tantalizing
future potential, investors may enjoy more benefits through a combination of
China and India opportunities, providing an optimum balance of risk, reward
and diversification. China and India appear to be an especially attractive play in
2010-2011, given the halting but sustained recovery that continues to play out
in the US, Europe and Japan.

Huzaifa Husain
Head of Equities-India, Portfolio
Manager, Mumbai
Ruchir N. Parekh
Portfolio Manager, Fixed Income,
Mumbai
Siddhartha Singh
Head of Product DevelopmentIndia/Product Specialist, Mumbai

1 European Central Bank, “Occasional Paper: Twin Titans for the New Millenium” 2008

54% of the world’s total population.15 billion people. additional disposable income.2 while India is closing in quickly. 5 April 2010 3 indiaonlinepages.4 Jointly. April 2010 2 200 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 0 Dec-04 100 Dec-03  300 Dec-02 India 400 Dec-99 China and India’s continued emergence can be directly attributed to these top three growth drivers: Market Growth • Strong commitment to investing for development. On the downside. 5 April 2010 7 Population Division of the United Nations – Department of Economic and Social Affairs. But. the story behind these two success stories begins with the sheer enormity of numbers. ports. representing only 4. Although India’s market has grown a remarkable 216. During the next two decades. fueling a wave of domestic consumption that has still not begun to ebb. China’s current economy is fueled by exports and domestic investment. Past performance is not indicative of future results. 1 July 2009 6 U.S. China’s population and workforce will continue to swell over the 2 Chinese Official Population Clock.9 Bloomberg. next decade. even with the strictly enforced “One Child” rule. As the two most populous countries in the world. increased domestic demand for food and resources.com. the world’s third largest. 12 April 2010. boasting more than 1. including US $1. 1 July 2009 8.11 . and potentially level off to zero population growth within 30 years. the United States runs a distant third with 309 million people. as well as enhanced export activity. utilities. China and India account for more than 37% of the world’s total population.com. China’s working population — those aged 15 to 64 — will reach approximately 1 billion people.    Clearly. it is estimated that Beijing will soon have to find jobs for 33 million people. have been hard hit by plummeting global export activity and increased adherence to global quality standards. Re-based to 100 at year-end 1999. including roads. while the Indian economy is driven by consumption and domestic investment. such as textiles.65% in the past 10 years.The “China India” story is one that unites three of the most prevalent themes in emerging markets: Strong export activity Extensive investment in development. growing middle class China 600 Dec-01 • Favorable demographics in the form of population size China-India Equity Market Growth 31 Dec 1999 to 31 Dec 2009 fIGURE 1 Dec-00 Similar Attributes for Success Source: Bloomberg MSCI Index-India and MSCI Index-China.5 By contrast. 12 April 2010 10 AsiaNews.3 although it is expected to surpass China by 2030. about half of both the Chinese and Indian populations are under age 45 — presumably with many good “buying years” ahead of them.5 Population Division of the United Nations – Department of Economic and Social Affairs. China currently ranks #1. toys and construction materials (specifically cement). as certain industries.10 In both nations.it. 2008 11 Sulekha.7 China’s population is also steadily becoming more affluent:8 Already. 5 April 2010 4. other infrastructure projects and factories.33 billion citizens. Local demand fueled by a burgeoning middle class MSCI India MSCI China 500 • Consumption by a huge. the middle class is also expanding at a meteoric pace.6 A recent UN population study indicates that these trends will continue — at least for the time being.16% growth during the same period (FIgure 1).9 All of these factors are expected to lead to greater production of goods and services. steel. expansion and improvement. Official Population Clock. China’s economy expanded by almost 12% in the first quarter of 2010 (11% in the fourth quarter of 2009) after a 4 trillion yuan stimulus program.3 trillion in new bank lending at record-low interest rates that was originally enacted in 2008. Adding to the positive outlook for continuing momentum. China has delivered a strong 94. ranking in the #2 spot with 1.

June 2010. 26 March. April 2010 12 Trading Economics. for example. National Statistics Offices. pension programs and affordable housing. pointing to a new era of trade cooperation. Tata introduced the US $2.11 Partially as a result of these favorable demographics. 2010 14 National Security Archive. both countries signed the Sino-Indian 11 Sulekha. consumer goods manufacturing. In 2009.7% GDP growth. UN.. could also benefit. apparel and energy. designed to make automobile ownership accessible to millions of Indians who previously could only afford a more dangerous motorcycle for their daily travel needs. as well as struggling developed nations.4tn (US$tn) % 14 70 India China 60 “Chindia” as a % of US (RHS) 10 50 8 40 6 30 4 20 2 10 0 1990 1995 2000 2005 2010 2015 2020 % of US GDP US GDP 12 0 Source: IMF. in 1993 and 1996. Service industries. including Brazil and Eastern Europe. Ongoing diplomatic tensions have also bubbled to the surface occasionally.000 years. these growth rates are predicted to pick up and reach 10% in China and 7-8% in India. China enjoyed strong 8. Unlike India.14 More recently. agriculture. Industries that benefit from being able to draw on a large. Business Day. Today the two nations share more than 2. promotion of private consumption remains a high priority. albeit symbolically. and that trend continues to grow. thousands of young people return to their homeland every year after studying or working abroad. however. and a long list of government initiatives includes health care reforms and increased spending on education. accounting and basic medical analytics. including a war between China and India in 1962 over a contentious portion near the Himalayas. The youthfulness of both nations also represents a key source of low-cost labor for business growth.7 billion viewers watched the Games worldwide according to Nielsen. China has recently become viewed as souring on foreign investment. stable mass of younger workers include construction. Goods and ideas have always flowed easily between the two nations: Buddhism was originally introduced to China via India as early as the second century B. In China. for example.com. CLSA AsiaPacific Markets. making it the largest global TV audience in history — and India is increasingly being recognized for its innovation in both the pharmaceutical and automotive industries. (Figure 2) China has also been able to attract favorable attention through the recent 2008 Beijing Olympic Games — more than 4. but also for cultural and technological exchanges between the two countries’ merchants. Over the next few years.13 Closely Linked for Centuries The argument for considering China’s and India’s prospects in tandem is firmly rooted in both countries’ history. 2010 3 .45% GDP increases in 2009. including call-center operations. In July 2006. while India lagged only somewhat with steady 6. In India.100 miles of border. 5 April 2010 13 New York Times. making headlines with actions that ranged from publicly criticizing the quality of foreign-made goods to pressuring Google® to leave the market by limiting its business activities.400 Tata Nano car.C. and India played a significant role in China’s Silk Road. although about half still qualifies as “disputed territory. which was important not only for trade.fIGURE 2 By 2020 China GDP Is forecast to be over US $12tn and India at US $3.12 These figures are even more impressive when compared to other emerging economies that have shrunk in response to recessionary forces. textiles. soldiers and pilgrims for nearly 3. such as those stemming from India granting asylum to the Dalai Lama in 1959 and China continuing to provide assistance to Pakistani nuclear-weapons-related projects starting in 1977 and continuing to the present day. World Bank. this legendary trade route was reopened with considerable fanfare. industry expansion and infrastructure projects.” These blurred boundary lines have sometimes led to heated conflicts.

17 . 22 April 2010 17 US Department of Commerce. India has emerged as China’s seventh largest export market. as well as key items that include capital goods. although neither country has agreed to the exact location of this key line of demarcation. the striking contrasts are also readily apparent.fIGURE 3 India’s Trade Deficit With China (US$billion) 0 Looking at the composition of India’s exports specifically to China. adding to her US $84. proximate nations naturally tend to forge trading relationships. 16 official languages and four major religions (Hinduism. and more than 250 of the Fortune 500 have IT and backoffice operations. Sikhism) — plus a national centralized parliament with two houses and more than 70 different ministries.16 (Figure 3) The future of both countries seems inextricably linked going forward. India/ China trade has increased by more than 50%. Citigroup Global Markets. A Study in Divergent Paths Because China is the world’s largest Communist state. replacing the US. Moreover.7 billion deficit. Citigroup Global Markets. Over the past five years. and her technology and engineering services-based export economy is often dependent on what China manufactures or copies in its thousands of factories nationwide. Given that these categories represent key components of investment growth. India imports electronic and engineering goods from China. and intermediates. principally in the form of iron ore. Rohini Malkani and Anushka Shah. As Figure 4 indicates. down to what seems to be their “national DNA. such as chemicals and minerals. despite the daunting odds that often define the emerging world. and China officially became India’s largest trading partner. this could limit gains seen on the export front. if only because of logistical convenience and the generally lower associated costs of transporting goods and exchanging services. Rohini Malkani and Anushka Shah. -5 -10 -15 -20 India’s trade deficit with China has widened 30 times in the last decade 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 -25 Fiscal Year Source: India Macroscope: Imminent RMB Revaluation: Revisiting ChinaIndia Trade Flows. and the recovery continues. Buddhism. and India is the world’s largest democracy. Jainism. steel. 22 April 2010 16 India Macroscope: Imminent RMB Revaluation: Revisiting China-India Trade Flows. China also speaks one principal language (Mandarin). demand is likely to be boosted as China’s purchasing power increases. China has built on its solid productmanufacturing legacy to become a largely export-driven economy. while India is a collection of 28 often-contentious states and seven union territories. In FY09. focused on ending conflict along the Line of Actual Control (LoAC). 22 April 2010 Bilateral Peace and Tranquility Accords. plastics and cotton. As of 2010. Citigroup Global Markets. Rohini Malkani and Anushka Shah. bilateral trade between the two countries reached more than US $40 billion.” China is a highly centralized nation with one ruling party. One hundred of the world’s Fortune 500 organizations maintain R&D facilities in India. more than half the demand is for ores and minerals (particularly iron ore). Nevertheless. the Chinese Communist Party. while India focuses primarily on its domestic market. 23 April 2010 4 Today India imports 10% of everything China exports. their sources of economic success are also vastly different. However.15 15 India Macroscope: Imminent RMB Revaluation: Revisiting China-India Trade Flows. demand for such imports may be on an uptick. outsourcing only high-end technology and business services. as both have achieved a relatively high degree of internal stability and global economic success. these countries contrast in nearly every way. which has been in power since its civil war victory in 1949. resulting in the deficit remaining high. 5 April 2010 and Reserve Bank of India. as well as China’s 10th-largest export market. While exports are lowvalue-added.

Chinese goods exports seem to compete increasingly with those of mature economies. such as roads. the European Central Bank concluded the following in comparing the two economies: “First. such as IT-related services. where as many as 2 million rural inhabitants were relocated to less desirable locations to create a hydroelectric reservoir. 2010 that this commitment to moving forward has also led to lax quality standards and human rights violations in the quest for economic progress and state unity. and a lack of proper efforts to inform. in this more individually focused environment. illiteracy. exports of services tend to complement its exports of goods. March. systematic discrimination against rural residents in the allocation of resettlement resources. China’s and India’s role in the global financial system is still relatively limited and often complementary to their roles in global trade. 18 US Department of Commerce. Yet. the day-to-day decisions that can help a business succeed also tend to be more streamlined due to this highly efficient. it is still working to shed its reputation for Third-World-style chaos. ports and trains. As the world’s largest democratic republic. housing development or dam project. private enterprises More foreign investors Influential. India. key decisions are often hampered by official bureaucracy and the legal requirements involved in gaining consensus. disease and malnutrition. This includes a lack of adequate major highways. supportive expatriate community Resistance to multi-lateral regulations by other nations       Source: Deutsche Bank. Clearly. centralized system. all without their consent or sufficient compensation. whereas the converse is true for India. Last. while India’s exports are growing only in deregulated sectors. let alone consult with the populations to be relocated.While China would seem to be a quantum leap ahead of India. endemic corruption and misuse of resettlement funds.00 per day and suffers from widespread poverty. India places a high value on business ownership. falsification of figures on their progress. of course. One high-profile example is the Three Gorges Dam on the Yangtze River. especially in remote rural areas. versus India’s approximately US $280 billion). such as those impacted by a new road. 5 April 2010 19 Human Rights in China/International Rivers Network. and many smalland medium-sized enterprises (SMEs) are continuously evolving into larger businesses. China and India are both defined by a mixture of opportunities and much-needed improvements. electrical power. is fIGURE 4 The China/India Scorecard China Governmental efficiency  Free-market economy Adequate infrastructure   Transparency of public information Significant urban development India   Property rights protections   Greater support for rapid entry by multi-national companies Greater support for local. Taimur Baig. Third. fresh drinking water and other basic necessities. China continues to far outpace India in terms of its sizable foreign exchange reserves (US $2. The vast majority of the country still lives on less than US $2. and in its essential infrastructure.19 The resulting firestorm of criticism worldwide has only begun to recently die down. Second. needed to sell its goods globally. the overall degree of China’s trade intensity is higher than fundamentals would suggest. Chief Economist. The downside. while Indian exports remain more low-tech. but intensified scrutiny of China by human rights activists continues. 2009 5 . including sufficient hospitals and health care for its burgeoning population. This can range from obtaining key permits from multiple governmental ministries to compensating those who might be adversely affected by key projects or initiatives. considering trade in goods.45 trillion. While it could also be argued that the socialist underpinnings of Communism limit incentives for individual business ownership and expansion in China. Other similar problems with Chinese dam and infrastructure projects have resulted in allegations of official cover-ups of inadequacies and failures in resettlement programs.18 Although India is committed to achieving enduring financial prosperity.” As a result.

and the amount of arable land is declining because of soil erosion and the demands of a growing population. A major stabilization program enacted in 2008 is helping to expand sewage and waste treatment facilities throughout the country. India’s relationship to natural resources is considered more sustainable overall than China’s. Farms also face threats from industrial and agricultural pollution.and water-pollution controls exist in India. as well as offering subsidies on household appliances and building materials only to residents living well outside its cities. although this is extremely unpopular with the electorate. These include westward expansion. 4 April 2010 6 According to the World Bank. purchasing industries that could generate imports or increase consumption over the long term. but only about 7% of the globe’s arable land. and making deals with Russia. While there has been a significant increase in private companies. According to a recent “China at 2050” report:20 China has one-fifth of the world’s population. It remains to be seen how both China and India will respond to pressure to adopt new. the country is defined by its more than 300. Its total energy consumption is second only to the United States. including land. some analysts believe China will become much more dependent on food imports. Because the subsidies heavily impact the national budget. with a greater focus on developing inland cities and communities. depending on future technological advances and newly installed government conservation and environmental policies. with the 150 largest employing more than 75 million people. with strong manufacturing.The Quest for Natural Resources Both countries are further united by their determined search for raw materials and commodities to meet future needs. Even within its own borders. The global financial crisis has now led China to place more emphasis on internal consumption as a driver of economic growth. Of that. and China is the second largest emitter of industrial carbon dioxide pollution. soil erosion and exhaustion. and deforestation occurring due to increasing consumption needs. the central government hopes to ensure more long-range sustainability for areas beyond the major metropolitan centers.21 Yet. “government favoritism towards state-owned . only about 33% is believed to be productive. but here China is far ahead of India due to central government foresight. In this way. as they have in the past. Nonetheless. stricter environmental guidelines. China’s economy remains more “hardware”-dominated. But that scenario might change. there are still water shortages. • China’s consumption of water already rivals that of the United States and continues to rise. India also appears to be doing more to stabilize agrarian communities through the National Rural Employment Guarantee Act Programme. including increased forest cover and reduced air and water pollution caused by rampant over-industrialization. The global environmental summit ended without any legally binding agreement by the two nations and without any prospects for further action in 2010-2011. Building on a series of Five Year Plans that target economic development and using their sizable capital. China has been steadily buying land in Latin America and Africa. 20 CNN 2009 21 Economic Times. according to a recent trend noted by McKinsey. rather than relying as heavily on exports.000 State Owned Enterprises (SOEs). • Given those variables. electrical power and water. as well as direct grants and subsidies for food. the government is trying to phase them out gradually over time. While air. Kazakhstan and Venezuela to secure its future oil supply. Opportunities by Asset Class and Industry Chinese Equities The current state of Chinese equities reflects the central government’s recent determination to learn from the past and prosper based on new insights. China has also achieved some significant gains. the Chinese government has developed a number of policies with the aim of developing its rural areas. partially because of the agrarian base of the economy and its strong internal focus. real estate and infrastructure sectors predominating. as proposed during the 2009 Copenhagen Climate Conference. fuel and fertilizer. This legislation ensures that one family member is guaranteed 100 days of wage employment per year to a rural household whose adult members volunteer to do unskilled manual work.

25 India’s SENSEX returned 80%. Shell. perhaps the biggest surprise in India is the robust scope of the country’s technologically advanced. further enhancing their reputation for raising 22 McKinsey Quarterly. computers and software services (IBM. information about all major companies is readily available through a Directors Database. Confidence in India’s equity market has continued to grow after the Congress Party’s decisive win in the most recent national elections. Electrolux). 2009 26 Money-zine. Clearly. Fortune 500 companies continue to invest in India across a spectrum of sectors: food and beverages (Coca-Cola. Sun. pharmaceuticals (GlaxoSmithKline. as senior leadership remains keenly aware of the political and economic risks of each decision. July 2008 23 European Chamber of Commerce. India has delivered some of the strongest equity performance of any emerging market.26 Long-standing corporate governance laws are also in place that facilitate transparency. heavy equipment manufacturing and banking. given the still low penetration of car ownership. ABB. no foreign firm can be the majority owner of any entity in industries such as life insurance. the best opportunities for Chinese equity investors seem to be in consumer goods. the Congress Party has successfully moved forward with two IPOs of government-owned firms. Additionally.companies is fading … as officials have attempted to strengthen domestic businesses and the economy to prepare them for unfettered global competition. For example. Bombardier). as the government has recently introduced somewhat draconian measures to cool off the market and drive speculators away. and petrochemicals and chemicals (BP. Other governmental reforms may be implemented slowly. construction. movie theaters and many other enterprises. dating back to 1875 (even older than Japan’s). the robust Bombay Stock Exchange (BSE) numbers 6. 2010 7 . insurance (Allianz. and the total market capitalization for the companies traded in the area of US $1. there were only 22 passenger cars per 1. financial services (Citigroup. the legislature began implementing much-needed. According to foreign investment guidelines issued by the National Development and Reform Commission (NDRC). foreign investment is prohibited altogether. Immediately afterward. engineering (Siemens.000 people in China in 2007. PepsiCo). compared to 451 for the US. the government announced that foreign investments in domestic travel agencies could now exceed 50%. foreign direct investment (FDI) activity and ownership is still heavily regulated. Philips. consumer durables (Samsung. For certain industries. In 2009. printing and publishing. The infamously booming China property market may well slow down now.”22 The outlook for equities in China continues to be defined by state-mandated policies. the BSE was the second stock exchange in the world to obtain ISO 9001:2000 certification. logistics (FedEx). muchdelayed financial reforms. Canon. and there is a 25% limit on overseas ownership in Chinese banks. as they remain largely unaffected by the downturn in export activity. For now. While the Shanghai composite returned 78% in 2009. consumer products (Unilever). BASF). semiconductors.1 trillion. high-speed stock market. Subsequently.600 listed companies — only the NYSE has more — and settlement times are now a brisk T + 2. Prudential). 2009 25 MSCI China. Alstom. In 2009 and thus far in 2010. In 2009. the average volume of business conducted on the BSE was approximately US $40 billion each month. 2010 24 CIA World Factbook. This also extends to the banking industry.24 Opportunities abound in India for savvy investors who are ready and willing to take the long-term view.23 Indian Equities For all of its challenges. for example. Honeywell). HSBC). LG. as the government tries to maintain steady high growth. Toyota). and the landscape may be liberalizing on an industry-by-industry basis. The automobile industry is another with relatively attractive prospects. For example. Ford. There is some cause for optimism. In fact. however. fund management. automotives (General Motors. the Chinese seem prepared to favor a more exclusionary long-term approach over short-term economic gains. as well as the Indian Corporate Electronic Reporting System (ICERS). However. while avoiding the “bubbles” that can form from the economy overheating.com. such as the processing of green tea using traditional Chinese techniques and ivory carving. according to the International Road Federation’s World Road Statistics 2009. As the oldest stock market in Asia. Pfizer).

April 2010 8 to blame. foreign investors must obtain licenses and both place ceilings on foreign holdings and charge withholding taxes.5-3. More recently. which are normally short-term and uncommitted. while the corporates were encouraged to borrow from the banks or tap equity markets for their financing needs. October 2008 29 India Macroscope: Imminent RMB Revaluation: Revisiting China-India Trade Flows. believe it is priced at fair value. but success has proven elusive. Citigroup Global Markets. as India is under constant pressure from the markets and rating agencies to reduce its chronic budget deficits. The Chinese currency landscape has also proven intriguing — more from the perspective of politics and diplomacy than a fundamentally driven valuation exercise. The currency question in China will remain a controversial issue that periodically flares up and drives speculation on potential China-US trade wars. The Chinese government bond market is the second largest in Asia. an appreciation in the RMB would lead to exports from China becoming less competitive.money through the equity market. given that their products would be priced more competitively. Countries that have a similar export structure to China — such as India – would benefit most from an RMB revaluation. Many experts argue that the yuan is significantly undervalued. as foreign investors can earn only relatively low yields in the context of emerging markets: CNY-denominated bond yields may go up to just 4% in the corporate space and 1. but many impediments remain. with yields that range from 8% to 15%. Rohini Malkani and Anushka Shah. political uncertainty. 5 April 2010 28 JPM Local Currency Guide.2% in the first quarter of 2010. Over time. Chinese high yield Eurobonds are currently dominated by approximately 10 Chinese property developers. In both. leading to faster development of the overall bond market. but India’s equity market appears to be on a sustained upward trajectory.29 One particularly attractive opportunity for foreign fixed income investors in China is in China-USD-denominated corporate bonds. including the Chinese government and the sell side. widening trade bands or a new currency basket. domestic investors have begun searching for alternative investments and other funding sources than banks and the equity markets. This market is relatively small. Its bond market has been well-developed since the mid-1990s. INDIA In contrast.30 Industry sectors of other issuers vary from domestic consumption plays to natural resources. delivering strong growth of 7. In the past. and foreign institutional investors are permitted. there seems to be greater understanding on the currency front between the two nations. but some. Over the years. albeit constrained by quotas.31 depending on the fundamentals. . the Chinese bond market was designed to fund government fiscal deficits. Recently. Although China is rich in its potential for bonds. and boost its purchasing power of imports. rather than lack of interest in capital markets. but it is developing. However. further rural development and relations with Pakistan and China will play out. and these are currently yielding 4% to 14%. as many corporates are looking to diversify their funding sources beyond bank borrowing. April 2010 31 Standard & Poor’s. as well as even gloomier doomsday scenarios. Chinese and Indian Fixed Income CHINA Chinese and Indian fixed income markets have already come a long way.28 Abundant liquidity and traditional reliance on bank lending for corporates are 27 Trading Economics. the market is primarily domestically focused. despite China’s vast size. should that mean gradual appreciation. Positive economic data has also supported the party’s cause.5% in government bonds. This time the outcome may be different. the government has begun gradually easing regulations. In theory. after Japan. the Indian government has undertaken several ambitious divestments plans of this type.27 It yet remains to be seen how unpredictable variables such as monsoons. 22 April 2010 30 Moody’s. they are both working to gradually minimize these obstacles to allow increasing foreign ownership. and the stage is now set for currency reform in China sooner than later. and their ratings span BB to B-. India’s currency continues to float against the US dollar and offers much broader fixed income potential.

32 Most of this money flows into traditional savings vehicles. Major market participants in India’s debt market include: • • • • • • • • • • • • India’s Central Government Public-sector Financial Institutions Reserve Bank of India Banks Primary Dealers Mutual Funds India’s State Governments Foreign Institutional Investors Public Sector Units Provident Funds Corporate Treasuries Charitable Institutions. Trusts and Societies It is important to note that the average Indian citizen does not carry significant debt.Government securities. The smaller number of large players has resulted in the debt markets being fairly concentrated and evolving into a wholesale negotiated dealings market.34 Bonds issued by public-sector enterprises (those in which the Government of India owns a majority stake) tend to grade at around 80-100 basis points over comparable 32 Confederation of Indian Industry. December 2009 34 Goldman Sachs. further supporting fixed income activity. while the government issues are auctioned to the participants. These are non-collateralized transactions. mutual funds. while corporate bonds are largely traded over-the-counter (OTC). the banks are regulated by the Reserve Bank of India. the principal drawbacks to India’s fixed income market are the fairly limited universe of financial instruments and limited overall access to the market. Public Sector .The Indian debt market consists of three main segments: 1. 3. comprising central and state government securities. The government regulates foreign-investor participation in India’s fixed income local markets by imposing strict quotas — currently US $5 billion for investments into India government bonds and US $15 billion into local corporates. and Treasury bills. where it is then recirculated into the economy in the form of loans. however. is risk-averse and typically has a high savings rate of 32% of disposable income. BRICs Monthly. and bonds of public-sector enterprises. Today a 10-year Indian government bond offers very attractive returns — 400 basis points over a US government bond33 — especially given that incremental risks are not increasing. This lack of a single overarching structure and more bureaucracy contributes to fewer market participants. insurance companies and corporates. Corporate debt issues are generally privately placed. 2008 33 Seeking Alpha. Secondary-market dealings for government securities and Treasury bills are done via Negotiated Dealing Settlement.Corporate securities comprising debentures/corporate bonds and commercial paper This market also has a well-developed term and call and notice money market. and negotiated through brokers. At present. the Indian government has never defaulted on any of its obligations. retirement funds and insurance. India also suffers from lacking a single financial services regulator that can help create a more cohesive marketplace. Corporates that do not make it into the marketplace typically depend on bank funding. Credit default swaps are non-existent. 2. Activity in non-public-sector companies and commercial paper is extremely thin. the collateralized borrowing and lending obligation (CBLO) platform is a unique feature that offers a secured. Fair Value of BRIC Currencies. financial institutions. For example. sometimes due to explicit guarantee and often due to the comfort of government ownership of the PSUs. the Pension Fund Regulatory and Development Authority (PFRDA). Corporate Sector . 16 March 2010 9 . but there is no secondary market for lower-grade commercial paper. In addition to ready-forward transactions. guaranteed platform for borrowing and lending monies in the institutional market. mutual funds are overseen by the Securities and Exchange Board of India (SEBI). and the national pension fund is governed by yet another regulatory body. Major investors in the debt markets are comprised of banks. as are longer-maturity bonds (those with maturities greater than 10 years). Pre dominantly a wholesale market. the Indian debt market is dominated by institutional investor participation. provident funds.Public Sector Undertaking (PSU) bonds are generally treated as surrogates of sovereign paper. such as bank deposits. Secondary markets activity on the corporate side is primarily for bank certificates of deposit at the short end of the curve. where players lend and borrow money among themselves. Sovereign . Despite the Asian economic crisis of 1997-1998.

These issuers enjoy the highest credit-quality ratings from domestic rating agencies due to their ownership. The picture of China’s and India’s immediate future is still coming into sharper focus. The market itself is very small with literally only a few issues. In India. Standard & Poor’s rates India as investment grade.. Despite having joined the modern age in many respects. Indian corporations have traditionally relied on raising funds at home to avoid currency risk. employment and housing-related industries. 35 Seeking Alpha. Although steady. as the issuers’ clients wanted access to dollar funding at the time. The central bank only became serious about tackling this issue recently through a series of emergency rate hikes. the opportunities are quite limited. China and India also carry inherent economic. Excessive monetary tightening could also squeeze growth in corporate earnings. Without more roads. her future growth will also depend on successfully establishing a world-class infrastructure.e. together with their relentless appetite for raw materials to accommodate population expansion. It is well known that local government entities engage in heavy borrowing that does not appear in any official statistics. while Moody’s considers it one notch below investment grade due to its high fiscal deficit and ongoing infrastructure issues. but the well-learned lessons of the past indicate there is still much more to be gained in the months and years ahead. In India’s USD-denominated corporate bond market. without more power. It is therefore imperative for this sector to keep delivering above GDP growth rates in order for India to flourish. At present. the number of cars cannot increase. Because the country’s bond market is deep and liquid. both countries’ determination to keep foreigners at arm’s length and the potential for currency and market fluctuations. Investments are also a high priority on the government’s agenda and prominent on investor radar screens. but inflation. their default risk is perceived to be the same as that of the Government of India. there are many unknowns related to full and accurate financial reporting in China’s economy. As a way of closing the budget gap. investment in infrastructure needs to be enhanced significantly. December 2009 10 Additionally. Most US dollar bonds were issued in 2006-2007. these expenditures are being funded through the use of off-balance-sheet special purpose vehicles.35 Weighing Political and Economic Risks As with all emerging markets. i. the chief risk in China is a potential property bubble.government bonds. ■ . without more ports. cultural insight and in-depth experience to identify and capture the right opportunities at the right time in order to avoid the pitfalls before they make an impact. as well as boom and bust cycles. It is obviously essential to be able to wield the local knowledge. trade will be unable to expand. excessive monetary tightening and the administrative measures needed to regulate the economy also represent concerns. and still more needs to be done to reduce the fiscal deficit. so any further delays and setbacks would clearly have a negative ripple effect. may well lead to higher inflation. If the government is too harsh in containing property price increases. Envisioning the Future Due to the difference in the immediate focus of the two economies. the government is trying to develop a unified tax rate for all types of assets and services so that there is more uniformity. as it has reached almost 10% year-over-year in March 2010 and may well increase. Instead. As for its stature among rating agencies. sustained measures have been taken to integrate India’s economy into a globalized environment. social and political risks for investors. For India to sustain strong GDP growth. it may have a negative impact on raw materials. for example. industrial production cannot grow. inflation is the key risk. including both countries in a portfolio would allow an investor to maximize a broader spectrum of opportunities. fairness and potential revenue generation inherent in the tax code. and a further rally in commodity prices would increase China’s imports. primarily banks that are priced quite expensively and return yields ranging from 4% to 7%. but that proposal has recently been postponed until 2011. while at the same time diversifying underlying political and socioeconomic risks.

Tezine joined the firm in 2005 as a Senior Analyst for Latin America.. Portfolio Manager. Tan joined the firm in 1999 and is responsible for managing Asia ex-Japan equity client portfolios. CFA. a boutique investment firm in Singapore. Kheng-Lai Tan. She was Director and Head of the Pacific Basin for Standard Life Investments (Asia) Ltd. She is responsible for the coverage of Latin American sovereign credits and market analysis. where she was responsible for the management of the Group’s Asian funds and a member of the Global Stock and Sector Insights Committee (UK). He is a Chartered Accountant and a member of the Chartered Institute of Corporate Secretaries and Administrators. Smirnova was a Junior Macro economist with the Emerging Markets Research team at Credit Suisse First Boston. where she was Director and Head of Asia ex-Japan. Mr. Ms. Emerging Markets Fixed Income PineBridge Investments. Senior Analyst. In 2008 she became Head of Research for the Emerging Markets team. she worked for the Moscow-based AIG Investment Bank. Emerging Markets Fixed Income PineBridge Investments. Managing Director. Prior to this. Ms Tezine began her investment career in 1993 at Unibanco. London Ms. Vice President. Prior to joining PineBridge Investments. Smirnova received a first class honors degree in BA Foreign Languages from the Moscow State Linguistic University. He also obtained his Certified Financial Planner designation. Soo joined the firm in 1989 and is responsible for Asia ex-Japan equities. a first class honors postgraduate degree in Financial Management from Finance Academy at the Government of the Russian Federation in Moscow and an MSc in Money. He received a Bachelor of Business Administration from the National University of Singapore. Soon also spent 10 years at Schroder Investment Management (HK). Smirnova passed Level I of the CFA program. Before that. Singapore Mr. Elizabeth Soon. Ms. Mr. responsible for asset allocation and stock selection in Asia. He is also responsible for managing the balance sheet and product portfolios related to Indonesian equities for AIG’s insurance operations (AIA Financial). Managing Director. His investment industry experience started in 1985 when he was a Portfolio Manager for New Zealand Equities. Soo graduated from Auckland Technical Institute specializing in Accounting and Finance. Barcelona. covering Russia and Ukraine. Banking and Finance (Merit) from the Middlesex University in London. she was a Senior Analyst at ABN Amro Bank Brazil and also Dresdner Bank Lateinamerika. Hong Kong Ms. Mr. . He was also involved in the establishment and running of Pheim Asset Management. Asia ex-Japan Equities PineBridge Investments. Head of Asia ex-Japan Equities PineBridge Investments. London Ms. Natasha Smirnova. Hong Kong Mr. Ms. Smirnova is a research analyst working in the Emerging Markets Fixed Income Team. She received a degree in Economics from the University of Sao Paulo and an MSc in Economics from the Universitat Pompeu Fabra.biographies Peter Soo. She is also a CFA charter holder and a board director of the Hong Kong Society of Financial Analysts. Managing Director. Tan began his career in investments as an Analyst with DG-GZB (Asia) in 1988. and managing retail unit trusts and large institutional portfolios. Senior Research Analyst. Tan worked as a Portfolio Manager with AGF of Canada and John Govett from the United Kingdom. Ms. Portfolio Manager. Prior to joining our firm. Soo also oversees regional portfolio management and strategic asset allocation. Mr. She joined the firm in 2004 as a Management Associate in the Emerging Markets Fixed Income Team. Andressa Tezine. having extensive experience in managing investment teams and running Asia equity portfolios. Asia ex-Japan Equities PineBridge Investments. Soon joined the firm in 2008.

Reliance Capital Asset Management Company. Husain has been a key member of the team advising AIG India Equity Fund (a Dublin domiciled India offshore fund). Risk Warning: Past performance is not indicative of future results. All PineBridge Investments member companies comply with the confidentiality requirements of their respective jurisdictions. *The team members located in India are currently part of AIG India Asset Management Company and are scheduled to transition to PineBridge Investments shortly. Mr. Parekh worked with Bear Stearns and Moody’s Investor Services in New York. Before that. Singh joined AIG Investments in 2006 as Head of Product Development based in Mumbai. This entity is authorised and regulated by the Financial Regulator in Ireland. and consequently the value of the portfolio. In making an investment decision. Husain was an Equity Analyst at Principal Mutual Fund and SBI Mutual Fund. Inc. Mumbai* Mr. The content included herein has been shared with various in-house departments within the member companies of PineBridge Investments. covering investment grade and high yield credits. Mr. and it may not be relied upon as such. all information contained herein is sourced from PineBridge Investments internal data. He has more than 12 years of experience in fund management in India. Certain middle and back office functions incidental to the services and products provided by PineBridge Investments and its affiliates may be outsourced to third parties. to go up or down. Prior to joining AIG Investments. Prior to joining the firm. At the firm. Parekh is responsible for driving fixed income investment strategy and managing fixed income portfolios of the domestic mutual fund schemes. in March 2010. where he was responsible for analyzing a variety of credits across several industries and asset-backed securities. The investment risks vary between different types of instruments. Mr. Husain received a Post Graduate Diploma in Management (PGDM) from Indian Institute of Management (IIM) Bangalore and a B. as the value of such an investment may fall suddenly and substantially. Mr. Mr. The value of portfolios we manage may fall as well as rise.com WP 5/10 . Opinions: Any opinions expressed in this document may be subject to change without notice.6661 www. he was working as a fixed income analyst at HDFC Asset Management Company. Our investment management services relate to a variety of investments. 800. Singh has a Master’s degree in Management Science (MMS) from DAVV. Mr. PineBridge Investments is a service mark proprietary to PineBridge Investments IP Holding Company Limited. Parts of this presentation may be based on information received from sources we consider reliable. he was head of the Product Development and New Initiatives function at India’s largest AMC . Husain joined the firm in 2004 and is now the Head of Equities in India. Readership: This document is intended solely for the addressee(s). We do not represent that all of this information is accurate or complete. however.Tech from the Institute of Technology (Banaras Hindu University). Prior to joining AIG Investments. PineBridge Investments Europe Limited is authorised and regulated by the Financial Services Authority (“FSA”). PineBridge Investments is a group of international companies acquired by Pacific Century Group from American International Group. Fixed Income. Mr. Services and products are provided by one or more affiliates of PineBridge Investments. Its content may be legally privileged and/or confidential. Parekh completed his MBA from the University of Hartford and is a Graduate in Commerce from the University of Mumbai. Approved by PineBridge Investments Ireland Limited. Ruchir N. Fixed Income. Indore and a Bachelor’s degree in Physics from Delhi University. Unless otherwise noted. Mumbai* Mr. He is also responsible for managing the India domestic funds. PineBridge companies provide investment advice and market asset management products and services to clients around the world. In the UK this communication is a financial promotion solely intended for professional clients as defined in the FSA Handbook and has been approved by PineBridge Investments Europe Limited. In the case of a higher volatility portfolio the loss on realization or cancellation may be very high (including total loss of investment).706. Portfolio Manager. Parekh. Siddhartha Singh. Mr. Mumbai* Mr. We are not soliciting or recommending any action based on this material. Singh was with ABN AMRO Bank responsible for branch banking operations and third-party product distribution. and the investor may not get back the full amount originally invested.Huzaifa Husain. Portfolio Manager. for investments involving exposure to a currency other than that in which the portfolio is denominated. Parekh joined AIG Investments in 2007 as Assistant Vice President. He has over 11 years of experience in the Fixed Income markets in India and the US. Head of Product Development-India/Product Specialist. in the ordinary course of completion.pinebridge. changes in the rate of exchange may cause the value of investments. Head of Equities-India. prospective investors must rely on their own examination of the merits and risks involved. For example. each of which can fluctuate in value. Prior to that.