China-India Integration To Spur Major Investment Opportunities
Indian IT major Tata Consultancy Services (TCS)’s decision to expand its presence in China dovetails nicely with our long-term view that India will benefit from a reorientation of China’s economy away from infrastructure investment and towards consumer services. At present, commercial and financial ties between emerging Asia’s two largest economies are trivial, and given the likelihood of enduring weakness in traditional exports markets of the US and eurozone, we expect the rise in bilateral economic activity to be one of the most powerful global investment themes of the coming decade.
TCS’s decision mirrors a move made by local rival Infosys Ltd in 2011 to add 4,000 employees in Shanghai and build a new US$130mn office in the city. We find these developments interesting for two main reasons. Firstly, it shows that while China faces a problem with rising low-end manufacturing wages, India is facing the same problem higher up the value chain. IT firms in the country have been forced to hike wages by around 10-20% in recent years due to growing shortages of talent at home.
Secondly, TCS’s decision to beef up its China presence fits nicely in line with our long-term view that India will benefit from a reorientation of China’s economy away from infrastructure investment and towards consumer services. In our October 2012 Special Report, ‘China After The Hard Landing: Global Winners And Losers’, we outlined our view that Chinese consumer services activity would outperform over the long term, which would bode well for emerging economies with large service export sectors. India’s IT industry stands out in this regard. Not only is there ample opportunity to expand its presence across China, but the traditional demand centres of the US and Europe are likely to remain anaemic for some time to come.
Against the backdrop of developed world deleveraging, the rise in bilateral economic activity between China and India could well become one of the most powerful investment themes of the coming decade. Trade between the two countries is extremely shallow, with India-bound goods accounting for just 2.4% of Chinese exports, and Indian outbound exports to China faring not much better. Meanwhile, as we have noted previously, despite being two of the most powerful commercial hubs in the emerging markets universe, we do not know of any major airline offering direct flights between Mumbai and Shanghai. This, in particular, illustrates the raw potential for long-term growth and investment opportunities, in our view.
Politics Is The Main Caveat
The major risk to this growth narrative is the intense rivalry between Beijing and New Delhi for regional political and economic influence. Diplomatic relations between the two countries have been frosty ever since a brief military conflict in 1962. While there has been something of a thaw in recent months, with the defence ministers of both countries meeting in September 2012 to discuss joint military operations, relations remain lukewarm at best. Meanwhile, increased competition amongst exporters could see a ramp-up in protection policies as both governments look to support their respective industries. Earlier this year, the Indian authorities imposed 21% duties on power equipment imported for large electricity generation projects, in a bid to defend local producers from cheaper Chinese imports. An escalation in such measures could delay, or even prevent, a material increase in cross-border commercial activity in the coming years.