China may be the world’s largest emerging economy, beating India in many economic and financial indicators. But India is beating China in an indicator that matters the most to emerging market investing: financial market development. This means that India is less prone to a financial crisis than China, and therefore, a better investment than China.
China’s economy outperforms India’s in many metrics, including World Forum’s Global Competitiveness – where China occupies the 28th and India the 39th position – and per capita GDP, where China beats India by more than three to one—see tables.
Apparently, China has been doing a lot of things right. That’s why it is suggested as a model for India.
But there’s an important metric, financial market development, where India beats China. India ranks 38, while China ranks 56.
India’s Competitive Performance
Source: World Competitiveness Index, World Economic Forum.
Financial development is the 8th pillar in The Global Competitiveness Index, and includes several sub-metrics that describe the soundness of a country’s financial sector. That includes such measures as domestic credit to private sector, financing of SMEs, corporate bond issuance, financing through equity markets, market capitalization of listed companies, soundness of banks, bank non-performing loans, and regulation of security exchanges.
Why is this metric so important? First, poor financial development leads to uncontrolled growth of credit, which fuels financial bubbles, which lead to economic crises.
That seems already to be the case in China. In a recent report the Bank for International Settlements (BIS), pointed to the rapid rise of China’s credit-to-GDP ratio, which now stands at 30.1, three times the threshold of 10 that indicates an impending financial crisis.
Second, the financial system is the Achilles heel of emerging market economies – the sector where economic crises arise, and the reason equity market rallies end and bear markets begin.
In fact, it was government’s heavy-handed intervention in financial markets that killed recent rallies in Chinese equities, which have been lagging behind Indian equities in the last five years. And things can turn worse, when China’s multiple bubbles burst.
That’s why I’d rather bet on Indian rather than Chinese equities at this point.
Source: Finance.yahoo.com 10/24/2016
Panos Mourdoukoutas is Professor and Chair of the Department of Economics at LIU Post in New York.
As originally appears: http://www.forbes.com/sites/panosmourdoukoutas/2016/10/26/why-india-is-a-better-investment-bet-than-china/#1802e2426bda