China way ahead on depth front

The Indian financial stock (including equities, bank deposits and debt) is valued at $0.9 trillion on Monday, or 137 per cent of the country's gross domestic product (GDP).

This is way less than China's, which has the second largest aggregation of financial stocks in Asia, valued at over $5.1 trillion and accounting for 19 per cent of Asia's total financial stocks worth $27 trillion, according to a study by consultants McKinsey & Co.

This means India's stocks at just one sixth of that of China and its depth is also a fraction of China's 323 per cent of its GDP. Further, India's growth has also been slower at 11.9 per cent against China's 14.5 per cent.

Global financial stocks valued at over $118 trillion, three times the size of the underlying global economy measured by world GDP, states McKinsey & Co in a study of financial assets of more than 100 countries.

Asia on Monday as a whole commands 23 per cent share of the total global financial stocks and its depth has risen from 230 per cent 10 years back to 330 per cent in 2003. Notwithstanding the gaping China-India difference, there has been a flood of funds coming into the Indian market, making its assets expensive.

India has been identified as one of the most expensive markets in Asia by Standard Chartered Plc, which is reportedly aiming to grow its private equity business 10-fold to about $300 million.

Foreign institutional investors (FIIs) have brought in almost $2.8 billion into the Indian stock markets alone and have also invested in the debt market. This figure accounts for about a third of the $8.5 billion brought into the country in calendar 2004.

The growth in the value of India's financial stocks has largely been fuelled by foreign institutional interest which expects rise in corporate earnings in keeping with the 7 per cent growth in GDP.

However, India's GDP figure of $631 billion is far smaller than that of China's $1.4 trillion. Though there are claims that China's financial stock is overstated due to its non-performing loans, even assuming that 25 per cent of China's bank deposits can be wiped out because of NPAs, the financial stock of China at approximately $4.3 trillion would still be 4.8 times the size of India, states McKinsey.

As far as the asset composition is concerned, there are some similarities between the two countries. Bank deposits in both countries are the most important asset class (62 per cent share in China and 45 per cent in India).

Unlike the US and European markets, bank deposits constitute a higher share of Asia's total financial stock and account for 41 per cent of the total.

Private debt securities in the two largest Asian countries are the least important given the early stages of development of their respective markets, states McKinsey. However, while unimportant in China, government debt securities account for 22 per cent of India's financial stock.