China & India: Myths and Realities

James McCormack Mumbai, August 2007

Agenda
Economic Structure and Performance International Perspective and Integration Business and Institutional Environment Sovereign Credit Comparisons

China India: Myth or Reality?

> Investment contributes more to growth in China than India > China + India account for more than 10% of global GDP > China + India account for more than 20% of global GDP growth > Indias FDI inflows are catching up with China > Intl debt securities issues are higher in India than China > Doing Business is easier in China than India > China scores higher than India in Global Competitiveness > Chinas sovereign creditworthiness is much stronger than India

Economic Structure and Performance International Perspective and Integration Business and Institutional Environment Sovereign Credit Comparisons

Gross Domestic Product By Sector (2006)

China
Primary sector 12%

India
Primary sector 18%

Industry 28%

Industry 49% Services 39%

Services 54%

USD 2,696 billion

Source: CEIC

USD 917 billion

Growth and Development

GDP per capita
(USD) 2,000 China India 0.8 0.7 0.6 1,000 0.5 500 0.4 0.3 1975 1980 1985 1990 1995 2000 2006

Human Development Index

China India

1,500

0 1986 1991 1996 2001 2006

Source: CEIC, Fitch

Source: UNDP, Fitch

Medium Term: Demographics Favour India

2006 Population > China: 1.323 billion
of which urban: 529 million

Population Pyramids 2007

China India

> India: 1.119 billion

of which urban: 325 million

(Age) 0-9 10-19

20-29 30-39 40-49 50-59 60-69 70-79 80+

Based on UN population projections, Indias population will surpass Chinas in about 2028

20

10

10

20

(% of population)

Source: UN Population Fund

Source: US Census Bureau

Contributions to GDP Growth (nominal)

China
(%) 20 15 10 5 0 -5 2000 2002 2004 2006 Consumption Investment Trade

India*
(%) 20 15 10 5 0 -5 2000 2002 2004 2006 Consumption Investment Trade

Source: Fitch

* Statistical discrepancy included in investment Source: Fitch

Current Policy Challenge Money and Inflation

China
(%) 6 5 4 3 2 1 0 -1 -2 2000 0 2002 2004 2006 10 5 20 15 Inflation* M2 growth* (right) (%) 25

India
Inflation*

(%)
8 7 6 5 4 3 2 1 0 2000 2002

M2 growth* (right) (%) 30 25 20 15 10 5 0 2004 2006

* 3-month moving average Source: CEIC

* 3-month moving average Source: CEIC

Banks and Domestic Non-government Bond Markets

Bank Credit
(% GDP)

Domestic Debt Securities*

India
(USDbn)

China

China

India

160 140 120 100 80 60 40 20 0 2001 2003 2005 2007f

400

300

200 100

0 2000 2002 2004 2006

Source: Fitch

* Govt securities: India $286bn, China $763bn Source: BIS

Economic Structure and Performance International Perspective and Integration Business and Institutional Environment Sovereign Credit Comparisons

Global GDP Shares*

2000
China 4% India 2%

2006e
China 6% India 2%

US 32%

US 28%

Rest of World 47%

Rest of World 55% Japan 9%

Japan 15%

* Nominal GDP converted to USD at market exchange rates Source: Fitch Peer Analysis Tool

Contribution to Global GDP Growth

Nominal GDP in USD at Market Exchange Rates
China 100% 80% 60% 40% 20% 0% 2002 2003 2004 2005 2006e 2007f 2008f India US Rest of world

Source: Fitch Peer Analysis

Global Trade Integration

Asian Exports as a Share of Global Imports
(%)
10 9 8 7 6 5 4 3 2 1 0 1996 1998 2000 2002 2004 2006e 2008f China India Japan Rest of Asia (right)

(%)
20 18 16 14 12 10

Source: Fitch Peer Analysis Tool

Global Investment Integration

Foreign Direct Investment, net
(USDbn) 70 60 50 40 30 20 10 0 1990
Source: Fitch

China

India

1992

1994

1996

1998

2000

2002

2004

2006e

Global Bond Market Presence

International Debt Securities, Net Issuance
(USDbn) 7 6 5 4 3 2 1 0 -1 2002
Source: BIS

China

India

2003

2004

2005

2006

2007

Economic Structure and Performance International Perspective and Integration Business and Institutional Environment Sovereign Credit Comparisons

Institutional Environment
Governance Indicators
China India Political stability
Percentile ranks 0-100 0 (centre) is worst

Voice and accountability

Government effectiveness

Corruption

Regulatory quality

Rule of law
Source: World Bank, Governance Indicators 2006

Business Environment
Enterprise Survey Results
Issue Management time with bureaucracy (%) Confidence in courts (%) Delay in obtaining electricity (days) Value lost to electrical outages (% sales) Avg time for exports to clear customs (days) China 18.52 82.45 10.45 1.23 6.16 India 6.67 74.70 19.97 6.62 13.58 Asia 7.25 65.83 12.02 2.39 3.71

Source: World Bank Enterprise Surveys

Business Environment
Ease of Doing Business Survey*
Ease of . . . Doing business Starting a business Employing workers Registering property Paying taxes Enforcing contracts Closing a business China 93 128 78 21 168 63 75 India 134 88 112 110 158 173 133

Ranks 1 to 176, 1 is best Source: World Bank Doing Business

Global Competitiveness Index*

China is behind, and losing ground to India > China GCI was 54 in 2006 (48 in 2005) > India GCI was 43 in 2006 (45 in 2005) > According to the Global Competitiveness Report
Productivity is higher in India, with more private investment Indias non-diaspora FDI inflows are higher than Chinas at a similar stage of development, with a greater high-tech component Soft infrastructure (governance, rule of law) is better in India than in China

* GCI ranks 125 countries. Switzerland ranked #1 in 2006 Source: World Economic Forum

Economic Structure and Performance International Perspective and Integration Business and Institutional Environment Sovereign Credit Comparisons

Sovereign Ratings Overview

FC IDR History
China
FC IDR LC IDR Short-term Country Ceiling A/Positive A+/Positive F1 A
China
AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B B-

India

India
FC IDR LC IDR Short-term Country Ceiling BBB-/Stable BBB-/Stable F3 BBB-

2000 '01

'02

'03

'04

'05

'06

'07

Source: Fitch

Public Finance Comparison Fiscal Balance

China
'A' Median
(% GDP)

India
China
(% GDP)

'BBB' Median 0 -2 -4

India

-1

-2 -3

-6 -8 -10

-4 2001 2003 2005 2007f

-12 2001 2003 2005 2007f

Source: Fitch Peer Analysis Tool

Source: Fitch Peer Analysis Tool

Public Finance Comparison Government Debt 2006

China
(%) 140 120 100 80 60 40 20 0 Debt/GDP Debt/Revenue 0 Debt/GDP Debt/Revenue 200 100 300 China 'A' Median (%) 400

India
India 'BBB' Median

Source: Fitch Peer Analysis Tool

Source: Fitch Peer Analysis Tool

Public Finance Comparison Fiscal Flexibility

Interest Payments/Revenue
(%) 40 China India
(% GDP)

Primary Balance
China 0 India

30

-1

20 10

-2 -3

0 2001 2003 2005 2007f

-4 2001 2003 2005 2007f

Source: Fitch Peer Analysis Tool

Source: Fitch Peer Analysis Tool

External Finance Comparison Current Account

Current Account + Net Foreign Direct Investment
(% GDP) 10 8 6 4 2 0 -2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007f China India

Source: Fitch Peer Analysis Tool

External Finance Comparison External Debt 2006

China
(%) 60 40 20 0 -20 -40 -60 -80 -100 Gross debt/GDP Net debt/CXR 0 -10 Gross debt/GDP Net debt/CXR 10 30 20 China 'A' Median (%) 40

India
India 'BBB' Median

Source: Fitch Peer Analysis Tool

Source: Fitch Peer Analysis Tool

External Finance Comparison Liquidity

FX Reserves, and External Liquidity Ratio*
(USDmn) 1,400 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007f
* (FX reserves + bank assets)/(Short-term debt on residual maturity basis) Source: Fitch Peer Analysis Tool

China reserves China liquidity (right)

India reserves India liquidity (right)

(%)
900 800 700 600 500 400 300 200 100 0

Rating Drivers
China Strengths
> FX income/investment flows > Improving public finances

India Strengths
> Track record on macro stability > Strong external balance sheet

Weaknesses
> Further banking reform needed > Local government liabilities

Weaknesses
> Weak public finances, high debt > Poor infrastructure impedes growth

China India: Myth or Reality?

> Investment contributes more to growth in China than India > China + India account for more than 10% of global GDP > China + India account for more than 20% of global GDP growth > Indias FDI inflows are catching up with China > Intl debt securities issues are higher in India than China > Doing Business is easier in China than India > China scores higher than India in Global Competitiveness > Chinas sovereign creditworthiness is much stronger than India

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