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Who's Got Performance?


When it comes to economic growth between these two up-and-coming powerhouses, China is outpacing India by a mile. But take a look at how Chinese companies perform relative to Indian businesses and the results look quite different.

A BusinessWeek analysis of financial data from Standard & Poor's Compustat shows Indian corporations are getting more bang for their rupee. A look at over 340 publicly listed companies from 1999 through 2003 (many Indian companies have yet to release their complete 2004 reports) reveals that Indian businesses have, with a few exceptions, outperformed their Chinese counterparts on return on equity (ROE) and return on invested capital (ROIC).

Indian companies perform better across various industry groups because they face greater market pressures. Despite plenty of government regulation, India is by and large a well-functioning market economy. This leads businesses to focus more on profits and performance. When it comes to free markets, China is a work in progress. China's government has big stakes in most publicly listed companies, so managers must be mindful of government agendas, such as employment, says Joydeep Mukherji, a director, in the Sovereign Ratings Group at Standard & Poor's.

The two countries also differ greatly when it comes to financing. "It's quite difficult to get capital in India," says Marcus Rosgen, regional head of equity research at Citigroup (C) in Hong Kong. In India, firms raise a larger share of capital in equity markets, so private investors play a key role in allocating capital and place an emphasis on return on equity. In China, the financing situation is quite the opposite. A notoriously high savings rate and large sums of foreign direct investment are keeping the cost of financing low for businesses.

The glut of capital in China is fueling excess capacity. A low cost of capital reduces the financial hurdle to start a new business or open a factory. The problem is compounded by the fact that Chinese manufacturing is concentrated in low-end production. The resulting price competition reduces profitability. And since most of China's major banks are state-owned, there is little emphasis on maximizing returns.

Progress is being made in China. There is a noticeable difference in ROE and ROIC between companies listed in the more internationally exposed Hong Kong stock market -- the so-called Red Chips -- and those listed solely on mainland exchanges. In 2003, the 25 Red Chip stocks had a return on equity of 14.8%, vs. 12.9% for mainland listed companies. In terms of ROIC, Red Chips produced an 11.6% return, compared with 9.7% for mainland outfits.

What's more, China is moving faster than India to improve its infrastructure. Unless India quickens the pace to improve energy production and distribution, as well as its transportation systems, the country risks stunting the growth potential of the economy and its own companies.

By James Mehring


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