Investment in Mumbai and Shanghai

The reason for this lack of development of the infrastructure in the inner city is a maze of totally antiquated property laws that have prevented landlords increasing the rents on the premises they let out, with the result that they have no incentive to maintain their properties in good condition.

Furthermore, tenants have the right to stay in their apartments for as long as they wish, and the children of tenants can even inherit the leases taken out by their parents, many of which date back to before the Second World War.

A friend of mine told me that years ago he inherited an apartment building in the city for whose apartments he is collecting a rent of less than US$1 a month! This lack of any property development over the last 25 years, unlike elsewhere in Asia, is also interesting given that economic activity is shifting to the outskirts of the city and to other regions of the country. Here India's totally incompetent government is unable to hamper economic development to the extent that it has in Mumbai's inner city

Still, what is reassuring about India is that, despite its horrendous bureaucracy, entrepreneurs have thrived and India is now home to many very promising companies doing business in all kinds of sectors, but especially in the fields of pharmaceuticals and software. The good news, not only for India but for the entire global economy, is that entrepreneurs are like rats who manage to survive in just about any environment, no matter how difficult. And that they show an impressive ability to adapt to even the harshest commercial and legal infrastructures by developing a high degree of immunity to these unfavorable conditions.

Moreover, entrepreneurs can mutate rather quickly in order to take advantage of opportunities in sectors such as software, for which there were no government impediments or regulations in India. Such is the power of free markets over bad governments and governments' interventions in the economy.

Yet it is discouraging to see Mumbai, the business capital of the world's second-most populated country, lacking a large foreign business community, such as we find in New York, London, Tokyo, Singapore, and Hong Kong. This is because of the government's inability to provide an efficient infrastructure and a more conducive business environment.

The Indian tragedy is that, in the absence of its bureaucracy and with, to paraphrase Adam Smith, a tolerable administration of justice (an efficient legal system with straightforward commercial laws and property rights), the country could easily grow at around 8-10% per annum - admittedly from a low base. This would boost per capita incomes significantly compared to the present level, which allows the economy to grow at only around 5% per annum while per capita incomes hardly budge.

Still, this may be an opportune time for investors to purchase Indian shares. The Indian stock market, which shouldn't have a meaningful correlation to foreign markets since India's economy doesn't depend too much on foreign trade and foreign portfolio flows (exports amount to just 10% of GDP), is at present extremely depressed. In my opinion, it is discounting to a large extent the country's problems.

In addition, time deposits as a percentage of total market capitalization, which has declined to just 21% of GDP, are now at an all-time high. The various listed India Funds, such as the Jardine Fleming India Fund (JFI), the MSDW India Investment Fund (IIF), and the India Fund (IFN), all sell at discounts of around 20% from net asset value. They might be a suitable vehicle for investors wishing to participate in the Indian corporate sector.

For an investment in a fund with a stronger bias towards a bottom-up approach to stock selection, our readers might contact Jon Thorn (jon@indiacapfund.com) who manages the Indian Capital Fund, of which I am the chairman. Jon Thorn has, in the past, written about India for the Gloom Boom & Doom report.

There could hardly be a stronger contrast than traveling to Shanghai after Mumbai: whereas inner-city Mumbai has stagnated in terms of infrastructure and real estate development, Shanghai has emerged as a modern and impressive city over the last decade. In fact, the rapid development of its physical and commercial infrastructure is unprecedented in history.

Furthermore, as an Indian minister pointed out to me, although it was achieved at a certain price in terms of human rights, the success Shanghai has achieved in improving people's standard of living and per capita incomes far outweighs those shortcomings. I have been visiting Shanghai regularly since 1989, and on each visit I am struck anew by its continuously changing skyline and the extent and speed of its modernization.

And this is the same city that, ten years ago when I first began to write about its impending emergence as Asia's most important commercial and financial metropolis, businessmen in Hong Kong dismissed as being far too bureaucratic and lacking the necessary educational infrastructure to develop!

I also visited Suzhou, a city I hadn't visited for over three years. At that time, there were just two industrial parks under construction on the outskirts of the city; now there are factories everywhere, with trucks continuously moving goods to and from Shanghai's port along a newly built highway. While I am fully aware of the problems that are endemic to the Chinese economy, including the difficulties facing foreign companies wanting to make money, the changes that have occurred in China in the last few years are simply extraordinary.

On my way back to Hong Kong I sat in a business class seat on China Eastern Airlines with significantly more legroom than in any first class seat of a US air carrier, not to mention the far friendlier service. And I mused how in the future airlines such as China Eastern and China Southern would dominate the skies. Meanwhile the Swissairs of this world, with their high cost structures, would become extinct.

I also thought that if I was twenty or thirty years old, I would move to China right away, as the opportunities there are just mind-boggling. Many people keep telling me that I was lucky to move to Hong Kong in 1973, when there lots of opportunities in Asia and at a time Asia was not yet discovered. But, the same is true today. However, the opportunities may no longer be as great in Hong Kong, Singapore, Taiwan and South Korea, but what about Bangalore, Shanghai, Beijing, Dalian, etc!