China and India: The two differ in business as much as they do in politics

The excitement among investors over the prospects of the "Brics" �C the big emerging markets of Brazil, Russia, India, China and South Africa �C has begun to metamorphose into a more realistic enthusiasm for "Chindia". China and India, after all, are by the far the largest and fastest growing of the five.

China, with 1.3bn people, and India, with 1.1bn, happen to be the world's most populous nations. Both economies are growing exceptionally fast, and both are increasingly dependent on imports of energy and raw materials.

Even some of the obvious differences that do exist are simply a matter of timing. Because China started growing earlier and grew faster, India is poorer and the average Indian still has only half as much income as the average Chinese.

The Indian economy, meanwhile, is starting to become more like China's. Jonathan Anderson, head of Asia-Pacific economics for UBS, notes that India, with low savings rates and resulting low investment, used to look more like Latin America than east Asia. Now its savings rate is approaching 30 per cent, and exports are rising as a share of gross domestic product.

Mr Anderson told the Foreign Correspondents Club in Hong Kong recently: "India is looking like a tiger." His talk was appropriately entitled: "India, the next China? Or China, the next India?"

Yet some of the differences between the two are so vast that they undermine any attempt at a common analysis. China is a Communist dictatorship, while India is the world's largest democracy. China's population growth will stop in the next two decades, while India will have to find jobs for hundreds of millions of young job seekers as the number of its inhabitants exceeds China's and heads towards 1.6bn.

Chinese leaders typically hand down orders for economic reform from the top, organise the rapid building of infrastructure and cater for the urbanisation that comes with economic growth.

Indian governments generally resist reform, prevaricate over investing in infrastructure and �C sentimental as they are about a non-existent ideal of rural Indian life �C refuse to cater for the tens of millions of rural migrants flooding into the cities.

When considering these attitudes, and the fact that China is a manufacturing power exporting nearly $1,000bn a year or seven times as much as India, it is tempting to conclude that China is destined for success and India for failure. The reality is more complex and more interesting, largely because of the way politics interacts with markets and with the private sector.

Indian financial markets are lively and robust (though not immune to bubbles), whereas Chinese markets are small and highly constrained by the limitations of the country's private sector and tight government controls.

India's leading private companies have carved out niches in sectors such as information technology, pharmaceuticals and financial back-office outsourcing that would normally find a place in a much more advanced economy. And they have reacted to onerous labour regulations by developing capital-intensive businesses that would not normally exist in a country with low-cost, surplus labour.

As a result, a cohort of the best Indian companies boasts an international competitiveness that allows them to make outward investments in developed economies �C and not just in the natural resources sector, where Chinese state companies are also eager buyers. Even if one excludes Tata's contested $10bn bid for Corus, the European steel group, overseas acquisitions by Indian companies will more than double to this year from last year's $4.5bn.

"Currently, the Indian model is generating more companies ready to move to a global scale of operations," says Gordon Orr, Greater China chairman of McKinsey, the consultancy. "The advantage of the Indian model has been the emergence of a few large-scale, capital-intensive companies early on."

In China �C although outsiders imagine a rampant capitalist sector thriving under the benign guidance of a nominally Communist government �C domestic private companies remain constrained by the need to work with powerful provincial governments and the state-owned enterprises that dominate all the key sectors of the economy.

"Private firms say: 'We can only be the concubines of the state-owned enterprises or the mistresses of the multinationals," comments a Chinese economist, who asked not to be named. Asked why the private sector could not be unleashed for the benefit of all, the economist replied: "It would be good for the economy, but not for the party."

Foreign investors say the Communist Party still has an ambivalent attitude towards private companies. It regards their main roles as giving support to state-controlled companies and providing employment for millions of workers �C which is why light industrial activities such as furniture-making are favoured activities.

With a couple of exceptions �C the jury is still out on Lenovo's acquisition of IBM's personal computer business �C Chinese brands have so far failed to make a big impact in foreign markets.

Struggling to make themselves heard among the many bullish analysts, a few sceptics have sounded warning notes.

India, they say, will be hamstrung by populism, a reluctance to open its economy and infrastructure bottlenecks.

China's growth will be stunted by its dependence on the US and other uncertain foreign markets (one of the disadvantages of openness) and by the Communist Party's refusal to allow the rise of a real free-market economy.

"It's taken for granted that China will grow fast unless there is political trouble," says Diana Choyleva of Lombard Street Research. "Even on economic grounds, that's not so clear."

In the race to become developed economies, China and India have very different challenges and can hardly be said to be on the same track. They might end up in the same place. But if they do, it will take a long time and each will have achieved success by a very different route.

CHINA WARRANTS MARKET IS BIGGEST

Less than 18 months after the first warrant was issued on China's stock exchanges, the country now boasts the world's biggest market for the financial instrument.

Chinese investors' love affair with warrants was an accidental outcome arising from a set of last-gasp stock market reforms and has been stoked up by a speculative fever that may not last.

Like options, warrants allow investors to buy a security at a future date for a fixed price. Warrants can also be bought and sold in their own right, making them potential objects of speculation as well.

According to data compiled by Goldman Sachs, warrant turnover on the Shanghai and Shenzhen stock exchanges reached $221.2bn over the first 11 months of 2006, against $207.8bn in Hong Kong.

Hong Kong's full-year turnover came in at $230bn, with incomplete statistics for China suggesting its final figure would exceed $244bn.

This is in spite of only 27 warrants being traded in China compared with more than 2,000 in Hong Kong.

Zhu Huacheng, derivative products analyst with Xiangcai Securities, said China warrants could change hands up to 150 times before exercise, compared with just 10 times in more mature markets. Warrants were embraced in China to help listed state-owned enterprises out of an awkward bind. Listed state companies had two classes of shares, one that could be traded on stock exchanges and the other that could not.

To realise the value of their non-tradeable "state shares", state-owned enterprises needed to render them tradeable. This required approval from minority shareholders, who feared dilution from the release of a large overhang of state shares.

To win their minorities over, state companies gifted investors free bonus shares and, in some cases, free warrants as well. In Hong Kong and other markets, investors buy warrants issued by independent third parties, such as investment banks.

Cheril Lee, executive director and head of Goldman's securitised derivative products in Hong Kong, said the market's momentum would depend on further initiatives from China's regulator, which has not yet given blanket approval for third-party issues but approves them on a one-off basis.

"It seems like they are quite supportive of warrants," Ms Lee said. "If the regulator allows third party warrants the market can stay [at current levels]."

A better way for Japan to live with its neighbours

In recent years foreign observers have reported increasing nationalistic pride in Japan. Such growing sentiment is rooted in frustration over gaps between Japan's security policy and the reality of today's world, and between contemporary Japan and its wartime past.

Japan's humiliation during the 1991 Gulf war first revealed the gap between the constraints of its pacifist constitution and the demands of the post-cold-war world. Despite its $13bn (€9.9bn) contribution, Japan was criticised for its inability to participate in the operations of the coalition forces. Meanwhile, controversy over Japan's wartime past - exemplified by the Yasukuni shrine, which honours 2.5m war dead, including 14 Class A war criminals - has loomed over its relations with neighbours, creating an opening for a harmful strain of nationalism.

The situation today is entirely different from that of the postwar era, when phenomenal economic growth was a source of national pride, absorbing many of the frustrations about external affairs. The rise of China and tensions vis-à-vis North Korea have deepened Japan's uncertainty about its contemporary surroundings. Domestic political developments in recent years have exacerbated the problem and fostered a policy-making process that is increasingly influenced by populism. Such capitalisation on popular frustrations can have dangerous consequences, particularly in foreign policy.

Japan's close relationship with the US has also contributed to nationalistic sentiments. The US has played an invaluable part in Japan's development as a member of the international community, yet its role as security guarantor has allowed Japan to avoid dealing with its contemporary contradictions. If these persist, they will not only damage Japan's national interest but may undermine the Japan-US relationship.

As the international community has increasingly faced non-traditional threats such as terrorism and the proliferation of weapons of mass destruction, the regional and global security environment has become more complex. This has brought the contradiction between Japan's pacifist constitution and its 60-year-old security policy, dependent on US military might, to the fore.

In light of domestic and foreign expectations for Japan to contribute internationally and assume a greater role in its own security, the country has enacted measures that authorise it to deal more directly with regional contingencies. Examples include the guidelines for Japan-US defence co-operation in 1997 and the anti-terrorism special measures law of 2001. A debate has also begun over revising Article 9, the "no war" clause of the constitution, to permit the use of force.

To respond adequately to non-traditional threats, Japan needs to discard the fictions and taboos constraining its security policy and articulate how and when it might use force - not as a means of resolving international disputes, but as part of the international community's collective self-defence.

Moves to reconcile the contradictions in Japan's security policy are best complemented by efforts to improve ties with east Asian neighbours and help build a more peaceful, prosperous and co-operative region. History has been one obstacle. Japan should not forget its past, but a focus merely on historical issues will exacerbate tensions. All sides must stop politicising history.

China's future role in east Asia also looms large over discussions about regional co-operation. China is in trans-ition. Japan must engage it as a great power and encourage it to align its interests with the rest of the region.

The key to building a prosperous and stable east Asia is to strengthen a sense of regional community by identifying areas of common interest - such as energy, the environment, income disparities, Aids and piracy - and working jointly on them step by step.

Intra-regional economic co-operation is making quick progress and the potential for further expansion of econ-omic ties should be emphasised.

The rise of nationalistic sentiment has become one of the challenges facing Japan as it debates its identity in the post-cold-war world. A two-pronged approach - revising outdated security policies and building an east Asian community - can help bridge the gaps that give rise to these sentiments, so that nationalism can be channelled in a constructive direction. This wouldenable Japan to live up to its potential as a respected leader in the region and in the world.

THE GLOBETROTTING GLOBALISATION GURU

When Paul Tiffany was teaching at Sasin Graduate Institute of Business Administration, Thailand's premier business school, one December, colleagues asked him on which beach he would be spending Christmas.

His response was that - au contraire - he would be running business seminars in Istanbul over the break.

The global demand for gritty but voguish business strategies is now big enough to keep even a workaholic ronin such as Prof Tiffany as busy as he wants to be. And that is likely to last as long as globalisation, defined as the triumph of free markets, endures, he says.

When the pace of globalisation - "the coming together on a platform of common values" - picked up after the fall of the Berlin Wall, so did the demand for people capable of decoding free markets and the US business model.

"America may notbe everybody's favourite country these days, but the world remains in awe of American business techniques," he says.

When a strategist at a recent investment seminar talked of the "esoteric"markets, Malta, Iceland and Turkey, that jolted even Prof Tiffany, who realised he had lectured in all three places in the previous 12 months. He works out of Berkeley's Haas School of Business,but will also teach this year in Shanghai, Beijing, Singapore, Kuala Lumpur,Thailand, Norway, Denmark and Switzerland, among other places.

"America is still the fount of management concepts. I don't want to sound arrogant, but the sheer depth, breadth and flexibility of the American economy, its constant search for profit and cost reduction, makes it so dynamic, so innovative, that much of the rest of the world is still playing catch-up," he says. "The American management model has become, de facto, the global model."

The urbane Prof Tiffany is no supporter of red, raw capitalism: he regrets corporate America's reluctant environmentalism, dislikes Washington's close ties to the energy industry and admits that free market capitalism is not always pretty.

But the widening realisation that international capital favours ruthless efficiency - "China can make it cheaper" - is acting as a scourge to complacency and tradition. The European Union's elaborate social system and Asian oligopolies alike are being shaken.

"I teach at Berkeley, which means you must quote Marx at every lecture. For Marx, capitalism was modernisation. And that means standardisation and commoditisation. That's what we're seeing - the suppliers are the lowest-cost producers wherever they are."

As a management trainer in corporations as diverse as Axa, Deutsche PostWorldNet, Crisco and Siam Cement, Prof Tiffany is keenly aware that ambitious organisations can now take little for granted.

Neither the Asian family-owned company that resists restructuring, nor the "socially responsible" European firm, may be comfortable with US-style cold-bloodedness, but they will both be increasingly at risk from more "rational" competitors, he argues.

That seems, de facto, to be the attitude of businessstudents from Beijing to Boston: "They want to learn the same things. They ask the same questions. They even dress the same."

Any "American model" lecturer who ventures forth with a few bright beads of basic capitalism to wow the locals will be quickly and rudely disabused. "You have to dig deep to keep them interested. Everyone's heard about the latest management fashions before you walk through the door."

But reading about something and experiencing are not the same thing. "International strategy" may seem premature to some students outside the west. Prof Tiffany was, for example, forced to abandon a course on the management of technology and innovation ("which I really liked") in Bangkok because the students did not find it relevant.

Pedagogic ability remains vital everywhere. "How can I say this without sounding conceited? I think I teach well. I've got good stage skills, a certain flair. You can be the smartest guy on the block, but if you can't communicate . . . "

The business education industry is now so "modern" that every MBA programme syllabus looks similar and the best business schools promise high-powered networking to justify their fees. This leads Prof Tiffany to argue that executive MBA programmes are becoming the flagships for the business schools.

"The typical MBA students don't really have the seasoning and the breadth of experience to leverage the insights someone like me can provide. But when students are in their mid-30s, with 10-15 years' experience behind them, they can get so much more out of a programme," he comments.

In the knowledge economy - using the terms of the management writer Peter Drucker - corporations must nurture their most valuable asset, their people, with continuous education, he says. "This is happening. The concept of lifelong learning has really taken root in the best firms, and I think the number of people being put into EMBAs signals that."

He never puts on a special act for international audiences: "They are paying you to be yourself. As an American professor I'm very open and interactive, which is refreshing and appreciated."

Nevertheless, he adds, "You can't expect Harvard-style participation from students in places like Asia. You have to adapt. Cold calling in class can upset people and I'm much more likely to break the class into groups to tackle problems." Students like personal stories and anecdotes almost everywhere: "Get off the textbooks. They love insider-type talk. A bit of reality."

No one has discovered what triggers innovation and the subject needs careful handling in the classroom, he says. The Anglo-Saxon societies that reward individual achievement have proved fecund (Berkeley's campus holds more Nobel Prize winners than Japan), but the creative impulse could shift elsewhere.

He finds it faintly alarming that the "Dummies" series of textbooks has been such a hit in the US, which is interesting, considering he himself is the author of the popular Business Plans for Dummies, now in a dozen languages. He also wrote "a real book", The Decline of American Steel.

The purpose of a corporation is to make profit, he tells his students - "Period. End of story." - and the greatest threat to profit is competition. Business people will inherently do, therefore, whatever they can to minimise competition. Free trade must always be protected from its components.

Yet, disconcertingly, cracks are now appearing in the global free trade system. His most interesting discussions with students happen these days, he says, when he asks them to imagine a fallback position after a breakdown of free trade.

"Globalisation happened because a single countryhad the will and the patience to act as enforcer. To say 'Eat your spinach! I know you don't like it, but it's good for you!'

"In the 19th century it was Great Britain. After the second world war it has been the US. Could it be China in the future?"

Prof Tiffany likes to sober up his students by reminding them that, historically, great powers have appeared and faded like comets. He also likes reminding students that the world was more tightly knit, more globalised, 100 years ago thanit is today.

"Is Iraq the beginning of the end of American power? Can you hedge against a crash in free trade? These are interesting questions."