INDIAN STOCKS HAVE AN EDGE OVER THEIR CHINESE COUSINS

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HONG KONG :  China's explosive economic growth and vast domestic market have made it the world's top destination for direct business investment. But when it comes to investing in the stock market, a recent study suggests India might be a better bet.

In a survey of 61 Chinese companies trading in Hong Kong and 69 Indian companies listed in Bombay, CLSA Emerging Markets concludes Indian companies enjoyed greater daily trading volume, offered a better return on equity and should have superior earnings growth during 2004. Indian companies also generally scored higher on CLSA's corporate-governance ratings.

"Everyone talks about China, but India offers better shareholder value," says Damian Kestel, a member of the CLSA regional sales team who conducted the study. "Indian companies look to make money, not just gain market share."

The study, in effect, highlights the contrasting approaches of Beijing and New Delhi toward developing their economies and capital markets. Where China's export-driven manufacturing growth has generated a rising tide of foreign investment in the country, India has been slower to open up. But it has done a better job of developing world-class companies.

So in this high-stakes competition for global capital between the world's two most populous nations, multinational companies have been more eager to make big investments in China and continue to view the Chinese consumer as an unparalleled opportunity. Yet India has spawned a greater number of companies that can compete on a global scale and whose management style bears a closer resemblance to their American and European peers. That list includes Indian software firms such as Infosys Technologies and Wipro, pharmaceutical concerns such as Ranbaxy Laboratories and a number of outsourcing companies.

These qualities should make Indian companies more appealing to foreign investors, the CLSA study suggests. This proved especially true among the largest Indian and Chinese companies, which tend to be the ones most closely watched by international fund managers.

In the category of stocks with a market capitalization of $2 billion or more, the survey found that Indian companies' return on equity of 30% was nearly double that of Chinese companies' 17%. In this group, Indian earnings per share were also forecast to rise 16% next year, compared with a 3% decline in earnings per share for the largest Chinese companies.

Moreover, the daily trading volume for this basket of Indian companies easily exceeds that of the large Chinese companies, even though the latter had a market capitalization nearly three times as big. That's because figures on China's market capitalization can be misleading; they often include large chunks of shares controlled by the government that rarely trade.

Still, India's advantage doesn't extend across the board. CLSA indicated that for companies valued at no more than $1 billion it was a "pretty even race" in terms of offering shareholder value. CLSA said China small-cap valuations also looked more attractive.

So far this year, investors have done almost equally well in both markets. The Morgan Stanley Capital International China index is up 33% in dollar terms, while the India index is ahead 31%.

And some fund managers argue that in the near term China offers a greater number of potentially attractive new companies to consider. For instance, three Chinese insurance companies -- PICC Property & Casualty, China Life Insurance and Ping An Insurance -- are expected to list shares in Hong Kong, and possibly in New York, by the middle of next year.

"I see more momentum in China than India in terms of the government making an effort to get companies listed," said Brad Aham, a senior portfolio manager at State Street Global Advisors in Hong Kong. He also says he thinks some sectors in China, such as energy, will gain momentum -- and be more responsive to shareholders -- as they begin to make acquisitions outside of China.

But Indian-market advocates counter that too much corporate activity in China remains state-directed, reflecting how Beijing has traditionally used the stock market as a means of bailing out weak state-owned enterprises. India , they argue, has better disclosure among its companies, stronger property rights and a more investor-friendly legal system.

Ray Jovanovich, a fund manager with Credit Agricole Asset Management in Hong Kong, says he favors Indian stocks over Chinese. He points to infrastructure-related companies such as Associated Cement and engineering firm Larsen & Toubro. The Indian banking system is also widely considered more advanced and stable than China's, where by some estimates nonperforming loans are approaching 50% of gross domestic product. Mr. Jovanovich says he likes ICICI Bank and Kotak Mahindra Bank.