TEMPORAL TRENDS IN STOCK MARKET IN

INDIA AND CHINA

Submitted in partial fulfillment of the

requirements for MBA Degree of
Bangalore University

Submitted By
Pallavi Jagdale
Registration Number:
04XQCM6062
Under the Guidance Of:
Professor S. Santhanam.

M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
Race Course Road, Bangalore-560001
 DECLARATION

I hereby declare that the Project report on ‘Temporal trends in stock market
in India and China’ is a record of independent work carried out by me,
towards partial fulfillment of the requirements for MBA course of Bangalore
University at M.P.Birla Institute of Management.
This has not been submitted in part or full towards any other degree or
Diploma of Bangalore University or any other University

Date: 05/06/2006 PALLAVI JAGDALE

Place: Bangalore 04XQCM6062

2
 PRINCIPAL’S CERTIFICATE

This is to certify that this report titled ‘Temporal trends in stock market in
India and China’ is the result of project work undergone by Pallavi Jagdale,
bearing the Register Number 04XQCM6062, under the guidance of Prof.
S.Santhanam. This has not formed a basis for the award of any
Degree/Diploma for any other University.

Place : Bangalore
Date : 05-06-2006 Dr. Nagesh.S.Malavalli

3
 GUIDE’S CERTIFICATE

This is to certify that the dissertation entitled “Temporal trends in stock

market in India and China” is an original study conducted by Pallavi
Jagdale, bearing register number 04XQCM6062, of M. P. Birla Institute of
Management, Associate Bharatiya Vidya Bhavan, under my guidance.

This has not formed the basis for the award of any Degree/Diploma by
Bangalore University or any other University.

I also certify that he has fulfilled all the requirements under the covenant

governing the submission of dissertation to the Bangalore University for the

award of MBA Degree.

Date : 05-06-2006 Professor S. Santhanam

Place : Bangalore

4
 ACKNOWLEDGEMENT

A teacher is a perennial source of inspiration and guidance in all the

academic activities of his students throughout. I whole-heartedly extend my
deep and sincere gratitude to Prof. Bisliah, faculty for Economics,
MPBIM, for his continuous guidance and help provided for completing this
research study.

I am also grateful to Dr N S Malavalli, Principal, M.P Birla Institute of

Management for his full support and encouragement while I was conducting
this research.

I am also thankful to Prof. S.S. Santhanam, M.P Birla Institute of

Management for sharing his expertise in the field of Statistics with me
whenever I approached him.

I also express my gratitude to all friends and family members for extending
their helping hand whenever I approached them. Without their help this
research could not have been presented in a proper manner.

Pallavi Jagdale

5
 INDEX

CHAPTER 1
INTRODUCTION 09

CHAPTER 2
OBJECTIVE 15

CHAPTER 3
DATA SOURCE 17

CHAPTER 4
RESEARCH METHODOLOGY 24

CHAPTER 5
EXAMINATION OF STOCK MARKET 28

CHAPTER 6
PERFORMANCE OF STOCK MARKETS 60

CHAPTER 7
CONCLUSIONS 64

6
 EXECUTIVE SUMMARY

This study examines the stock market trends in China and India and the magnetism of
both the markets in the near future from the point of view of the investors. The objective
of this paper is to examine the degree of stability in both markets and to study the some
of the economic policies followed by both the nations. Monthly stock Indices from both
Indian as well as Chinese stock markets were considered for the purpose of this study.
The trends were calculated using the principle of least squares.

Some of the policies followed by both the countries have been studied. Some of these
policies have reflected in the stability or volatility of the stock markets. A study into the
causes of rapid growth of China when compared to India has been carried out.

It has been observed that the Chinese have adopted defensive techniques in times of
crises such as Sep 11 attack in America, Asian financial crises and Iran war. This is
reflected by the behavior in the stock market trends. They also induced competition
among the domestic players to match up to international standards. The key areas of
strength lie in the production sector.

On the contrary, India’s reaction to external crises has been significant. Many new
policies were introduced at different times to enhance the productivity. The Sep 11
attack, Iran war, and Asian financial crises have led to a large degree of volatility in the
stock markets. However quick reforms have led to speedy recovery in the stock markets.
The key areas of strength in India lie in the software, and pharmaceuticals.

Also the degree of volatility between National Stock Exchange of India and Shanghai
Stock Exchange of China has been tested using the Principle of Least Squares. The
standard errors of the estimates were subjected to F test to check for their significance.
The test proved that National Stock Exchange had a high degree of instability compared
to Shanghai Stock Exchange of China.

7
A test for the level of consistency was also carried out between the two markets. The
results of this test also proved that Shanghai Stock Exchange was more consistent than
the National Stock Exchange.

8
CHAPTER 1
INTRODUCTION

9
 INDIAN ECONOMY vs CHINESE ECONOMY

China and India had similar development strategies prior to their breaking out of their
deliberate insulation from the world economy and the ushering in of market-oriented
economic reforms and liberalization. China began reforming its closed, centrally planned,
non-market economy in 1978. India always had a large private sector and functioning
markets, which were subject to rigid state controls until the hesitant and piecemeal
reforms of the 1980s. These became systemic and far broader after India experienced a
severe macroeconomic crisis in 1991. The political environments under which reforms
were initiated and implemented in the two countries and their consequences were very
different. India continues to be an open, participatory, multiparty democracy, while China
has an authoritarian, one party regime, though it is liberalizing.

A study conducted by T. Srinivasan on economic performances of India and China

reveals some of the facts mentioned below on the growth of both the economies and the
competition between the two countries. Some of the parameters based on which the
economic performances are checked in this survey have been fiscal situation, exports and
imports, FDIs, exchange rates and foreign reserves.

China’s accession to the WTO and its further integration with the world economy has
improved the efficiency of resource use through greater competition, inflow and adoption
of better technology, and improvements in financial intermediation from the operation of
foreign banks and other intermediaries could more than offset the effects of any decline
in investment.

In India, the official Tenth Five-Year Plan (2002-07) projects an 8% average rate of
growth for the period of 2002-07. Given the slower average growth of 5.5% per year in

10
the recent past (1997-98 – 2002-03), legitimate queries have been raised about the
feasibility of attaining and sustaining an average annual rate of growth of 8% or more in
the next couple of decades. India has to go a long distance in integrating its economy
with the world economy and in attracting foreign direct investment (FDI) when compared
to China, and both could have growth augmenting effects. India’s domestic reform
process, after having slowed down since the late nineties, is gathering momentum. India
is in the process of making more and more reforms in order to attract FDIs and be
globally integrated. Despite these efforts China stays far ahead of India in certain key
areas.

Clearly, with an augmentation of the forces of competition, both domestic and

international, and acceleration of the pace, broadening and deepening of reforms, the
target of 8% growth could be attained and exceeded. Whether these necessary steps
would come about still remains unanswered.

Fiscal Situation

China appears to be in a much better fiscal position as compared to India, with a very
modest fiscal deficit of 3.3% of GDP and a debt/GDP ratio of only 26.3% in 2002. In
contrast, the central government’s fiscal deficit in India in 2002-03 was 5.9% of GDP
with the deficits of states adding another 4.6% of GDP. The overall debt/GDP ratio was
75.3%.

However, World Bank points out that a costly reform agenda lies ahead for China that
includes pension/social security reforms and dealing with accumulated non-performing
loans (NPLs) of the four largest publicly owned banks. Although NPL to assets ratio had
declined to 26% by the end of 2002, this is believed to be the outcome of large increases
in new loans rather than a contraction of old NPLs through better collections.

11
The sterilization of the enormous inflows of foreign capital through the issue of ad hoc
bills by the central bank at interest rates exceeding the rates earned on foreign assets of
the bank in effect adds to the fiscal deficit, if it is properly treated in budget accounting.
Although the current level of budget deficit could be sustained indefinitely by restricting
expenditures to 22% - 23% of GDP, the costs of future reforms might require a
combination of policies on the tax and expenditure sides.

External Sector

Trade in Goods and Services

China continues to outpace India in global integration. In 2002, it was the world’s fifth
largest exporter of merchandise, with a share of 5% of world exports according to WTO
reports. China is tenth in commercial service exports, with a share of 2.5%. Its growth in
the share of merchandise exports is phenomenal, more than quadrupling during 1983-
2002. India is a distant 30th in world merchandise trade, with a share of 0.8% in 2002,
which represents a growth of only 60% during 1983-2002. A more disaggregated picture
in terms of the changes in the shares of India and China of several labour-intensive
exports in the world as well as in the major markets of North America and the European
Union reveals China’s success relative to India’s even more starkly. In almost every
commodity and market, China’s share has grown rapidly since 1978, whereas India’s
share has grown much less, if at all.

In the exports of commercial services, India lags less behind China, being the 19th largest
exporter, with a share of 1.5%. Although growth of China’s service and merchandise
exports far outpace average growth of world exports, its merchandise exports grew much
faster than service exports, so that the share of service exports in total exports has fallen
to one of the lowest such ratios for any major country. In contrast, India’s service exports
are growing at about double the rate of its merchandise exports, and if current trends
continue, the share of service exports in total exports will exceed 50% in a decade.

12
There is one service sector, viz. Information Technology (IT), in which India has notably
outstripped China. In 2002, India’s IT exports were almost $10 billion, compared with
$1.5 billion from China. According to a report by consultants, 40% of China’s IT exports
involved Indian IT companies based in China. The Indian IT giant, Infosys has won
contracts with China’s financial sector, and says that India is five to seven years ahead of
China in the software sector, primarily because of the lack of facility with the English
language among Chinese and the absence of experienced project managers in China.
However, he expects that China will catch up with India very quickly.

India is also ahead of China in pharmaceuticals. United Nations buys more than half of
its vaccines from a private Indian company. Much of China’s vaccine production does
not meet international standards. Recently, two Indian pharmaceutical companies, along
with a South African company, have entered into a contract with the Clinton Foundation
to supply generic anti-retroviral drugs to treat AIDS at a much lower cost than Western
companies. The fact that in both software and pharmaceuticals it is India’s highly
educated who are the driving force raises the possibility that: “If India can turn into a
fast-growth economy, it will be the first developing nation that used its brainpower, not
natural resources or the raw muscle of factory labor, as the catalyst”
Clearly, successful use of brainpower by India, with service exports as the engine of
growth, would be in sharp contrast to China, whose growth acceleration was driven by
manufactured exports that exploited its cheap labour.

The perception of China as offering rapidly growing opportunities for Indian exporters is
reflected in rapid growth of bilateral trade, which doubled in 2001 and 2002 and is
expected to reach $7.5 billion at the end of 2003. In the three years 1999-2000 to 2002-
03, India’s exports to China increased at an average of 50.2% per year, and imports from
China at 26.6% per year

Foreign Direct Investment

China receives a much larger flow of net foreign direct investment at $57 billion in 2003
than India’s, which was under $4 billion in 2001-02. Whether it is China’s cheaper, more

13
reliable power supply or the more rapid turn around at its ports, China remains an
incalculably better environment for most manufacturing than India, which is slowly
waking up to this. This environment and the bureaucratic obstacles at all levels of
government in India in large part explain the huge flow of FDI to China relative to India.
The Indian government has recognized FDI as key for achieving the Tenth Plan target of
8% annual growth and appointed a steering committee on FDI in 2001. It reported in
2002 with several recommendations for making India more attractive as a destination for
FDI.

Foreign Reserves

China has accumulated a substantial foreign exchange reserves, exceeding its annual
imports. India has done the same—its reserves, around $92 billion at the end of 2003,
exceed by a substantial margin the likely imports of $60 billion. The issues of the
appropriate level of reserves, and whether both countries have accumulated far too much
relative to what would be needed to smooth volatility in export earnings and import
expenditures and to contain any potential financial crisis like the one experienced by East
Asia in 1997

Any attempt to determine the appropriate level of reserves has to be based on an analysis
of the appropriate exchange rate regime for either country, and the related issue of
whether the benefits from integration with the global financial markets outweigh the
costs.

14
CHAPTER 2
OBJECTIVE

15
OBJECTIVES OF THE STUDY:

The main objective of the study is to estimate the degree of volatility of Indian and
Chinese Stock Market and to analyze the factors affecting the volatility of these markets.
The study also focuses on the comparison of economic policies that led to the stability or
volatility of the stock markets of both the countries from 2001-2005 and to determine the
causes for the fast growth of China when compared to India.

JUSTIFICATION AND RELEVANCE:

The analysis on the economies of India and china has been of great interest to
economists, since they are predicted to be super powers in the days to come. Investors all
over the globe are keen on their returns on Investment in these two countries. Therefore it
becomes essential to study the economic developments of both the countries.

16
CHAPTER 3
DATA SOURCE

17
METHOD OF DATA COLLECTION:

Data collected for this purpose of this study is secondary data. Historical data has been
collected for National Stock Exchange, India and Shanghai Stock Exchange, China from
different websites.

STOCK EXCHANGES:

Shenzhen Stock Exchange (the SSE)

The Shenzhen Stock Exchange (the SSE) is a mutualized national stock exchange under
the China Securities Regulatory Commission (the CSRC), which provides a venue for
securities trading. A broad spectrum of market participants, including 540 listed
companies, 35 million registered investors and 177 exchange members, create the market.
Here buying and selling orders are matched in a fair, open and orderly market, through an
automated system to create the best possible prices based on price-time priority.

Since its creation in 1990, the SSE has blossomed into a market of great competitive
edges in the country, with a market capitalization around RMB 1 trillion (US$ 122
billion). On a daily basis, around 600,000 deals, valued US$ 807 million, trade on the
SSE.

China securities market is undergoing fundamental changes. The implementation of the

new Securities Law, Company Law, self-innovation strategy as well as the development
of non-tradable share reform embodies enormous opportunities to the market. Adhering
to the principle of “Regulation, Innovation, Cultivation and Service”, the SSE continues
to maintain its focus on developing the Small and Medium Enterprises Board, while
seeking for a tier market.

18
SSE 50 Index
SSE 50 Index selects 50 largest stocks of good liquidity and representativeness from

Shanghai security market by scientific and objective method. The objective is to reflect

the complete picture of those good quality large enterprises, which are most influential in

Shanghai security market.

CONSTITUENT LIST OF SSE 50

COMPANIES

Shanghai Pudong Development Bank Co., Ltd Youngor Group Co.,Ltd.

Guangzhou Baiyun International Airport Yanzhou Coal Mining Company Ltd

Co.,ltd.
Wuhan Iron and Steel Company Limited.
Shanghai International Airport Co., Ltd.
Huaneng Power International, INC.
ShanDong Aluminium Industry
Co.,Ltd.
Shanghai Zijiang Enterprise Group
Co.,Ltd.
Jiangxi Ganyue Expressway Co.,Ltd.

Hua Xia Bank Co.,Limited Yantai Wanhua Polyurethanes Co.,Ltd.

China Minsheng Banking Corp.Ltd Shanghai Zhenhua Port Machinery

Co.,Ltd.
Shanghai Port Container Co.,Ltd. Cosco Shipping Company Limited

Baoshan Iron & Steel Co., Ltd. Sinochem International Corporation

Henan Zhongyuan Expressway Company Kweichow Moutai Co.,Ltd.

Limited

19
China Shipping Development Company Ltd
Huadian Power International Corporation
Limited
China Petroleum & Chemical Corporation
China Southern Airlines Company Limited
Citic Securities Co., Ltd.
Fujian Expressway Development Company
Limited
China Merchants Bank Co.,Limited
China United Telecommunications
Corporation Ltd.
Minmetals Development Co., Ltd.
Guangzhou Development Industry (Holdings)
Co.,Ltd.
Tsinghua Tongfang Co., Ltd
Shanghai Automotive Co.,Ltd.
Shanghai Belling Co.,Ltd.
Long March Launch Vehicle Technology
Co.,Ltd.
Shanghai Zhangjiang Hi-tech Park
Development Co.,Ltd.
20
Founder Technology Group Corp.
Svaelectronco.,Ltd.
Shenergy Company Ltd
Shanghai Municipak Raw Water
Co.,Ltd.
Fuyao Glass Group Industries Co.,Ltd
Shanghai Petrochemical Co.,Ltd
Tian Jing Gang Ji Tuan Gu Fen You
Xian Gong Si
Top Energy Company Ltd.Shanxi
Gd Power Development Co., Ltd
Insigam Technology Co.,Ltd.
Maanshan Iron & Steel Company Ltd
Shanghai Oriental Pearl (Group) Co.,
Ltd
Sichuan Changhong Electric Co.,Ltd
Inner Mongolia Yili Industrial Group
Co.,Ltd.
China Yangtze Power Co.,ltd.
NATIONAL STOCK EXCHANGE:

The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It
was set up in 1993 to encourage stock exchange reform through system modernization
and competition. It opened for trading in mid-1994. It was recently accorded recognition
as a stock exchange by the Department of Company Affairs. The instruments traded are,
treasury bills, government security and bonds issued by public sector companies. The
number of members trading on the exchange has been on a steady increase, helping
integrate the national market and providing a modern system with a complete audit trail
of all transactions.

The National Stock Exchange (NSE) is India's leading stock exchange covering various
cities and towns across the country. NSE was set up by leading institutions to provide a
modern, fully automated screen-based trading system with national reach. The Exchange
has brought about unparalleled transparency, speed & efficiency, safety and market
integrity. It has set up facilities that serve as a model for the securities industry in terms
of systems, practices and procedures.

S&P CNX Nifty

The "Nifty-Fifty" was a group of large-cap growth stocks that became the market's
darlings in the late 1960s and into the early 1970s. They were great companies that
became known as "one-decision" stocks - stocks that you should buy, no matter how
expensive, and hold forever. The Nifty-Fifty term was coined because there were about
fifty of these companies with very high price-to-earnings (P/E) ratios. Many had a P/E of
fifty, or even higher. For example, at year-end 1972 Xerox traded at forty-nine, Avon at
sixty-five, and Polaroid at ninety-one times earnings. The bear market of 1973-74 saw
these stocks collapse in a manner that was quite similar in speed and size to the collapse
that occurred in technology stocks, and large-cap growth stocks in general, in early 2000
when the that bubble burst. S&P CNX Nifty is a well-diversified 53 stock index

21
accounting for 24 sectors of the economy. It is used for a variety of purposes such as
benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized
company focused upon the index as a core product. IISL have a consulting and licensing
agreement with Standard & Poor's (S&P), who are world leaders in index services.

S&P CNX Nifty - Constituent List

ABB Ltd. Larsen & Toubro Ltd.

Associated Cement Companies Ltd. Mahindra & Mahindra Ltd.

Bajaj Auto Ltd. Maruti Udyog Ltd.

Bharti Tele-Ventures Ltd. Mahanagar Telephone Nigam Ltd.

Bharat Heavy Electricals Ltd. National Aluminium Co. Ltd

Bharat Petroleum Corporation Ltd. Oil & Natural Gas Corporation Ltd

Cipla Ltd. Oriental Bank of Commerce

Dabur India Ltd. Punjab National Bank

Dr. Reddy's Laboratories Ltd. Ranbaxy Laboratories Ltd.

GAIL (India) Ltd. Reliance Energy Ltd.

Glaxosmithkline Pharmaceuticals Ltd. Reliance Industries Ltd

Grasim Industries Ltd. Steel Authority of India Ltd.

Gujarat Ambuja Cements Ltd. Satyam Computer Services Ltd.

HCL Technologies Ltd. State Bank of India

22
Housing Development Finance Corporation Shipping Corporation of India Ltd.
Ltd.
HDFC Bank Ltd. Sun Pharmaceutical Industries Ltd.

Hero Honda Motors Ltd. Tata Chemicals Ltd.

Hindalco Industries Ltd. Tata Motors Ltd.

Hindustan Lever Ltd. Tata Power Co. Ltd.

Hindustan Petroleum Corporation Ltd. Tata Steel Ltd.

ICICI Bank Ltd. Tata Tea Ltd.

Infosys Technologies Ltd. Tata Consultancy Services Ltd.

Indian Petrochemicals Corporation Ltd. Videsh Sanchar Nigam Ltd.

I T C Ltd. Wipro Ltd.

Jet Airways (India) Ltd. Zee Telefilms Ltd.

23
 CHAPTER 4
RESEARCH METHODOLOGY

24
 RESEARCH METHODOLOGY:

The first objective is to study the factors affecting the performance of stock markets of
both the countries post-liberalization. The time period considered for this particular study
ranges from 2001-2005. Therefore the first method is

Diagrammatic representation using trend line

Plot the trend line using 3 point moving average and analyze the various factors affecting
the performance of the stock markets. Some of the parameters considered in this regard
are the industrial output inclusive of exports and imports, savings and investment
patterns, foreign investments and some of the economic policies introduced by both the
nations to enhance the economic performance which led to the stability or volatility in the
stock exchanges of both the markets.

The second objective is to determine the volatility of the stock markets under
consideration for both the countries. This is done as follows

TREND FITTING BY PRINCIPLE OF LEAST SQUARES

The method of least squares is the most popular and widely used method of fitting
mathematical functions to a given set of observations. It has the following advantages.

Because of its analytical and mathematical character, this method completely eliminates
the element of subjective judgment or personal bias on the part of the investigator.

The trend equation can be used to estimate or predict the values of the variable for any
period in the future or even in the intermediate periods of the given series and the
forecasted values are also quite reliable.

25
The curve fitting by the principle of least squares is the only technique, which enables us
to obtain the growth rate per annum, for yearly data, if linear trend is fitted.

Method of curve fitting by the Principle of Least Squares: The principle of least
squares provides us as analytical or mathematical device to obtain an objective fit to the
trend of the given time series. Most of the data relating to economic and business time
series conform to definite laws of growth or decay and accordingly in such a situation
analytical trend fitting will be more reliable for forecasting and predictions. This trend
can be used to fit linear as well as non-linear trends.

Fitting of linear trend: Let the straight line trend between the given time series values
(Y) and time (t) be given by the equation:

Y = a + bt

Then for any given time ‘t’, the estimated value Ye of Y as given by this equation is :

Ye = a + bt

The principle of least squares consists in estimating the values of a and b, so that the sum
of the squares of errors of estimate in minimum, the summation being taken over given
values of the time series.

E = ∑(Y-Ye)2 = ∑(Y-a-bt)2

This will be so if:

∑ y = na + b∑t
and
∑ t y = a ∑ t + b ∑ t2

where n is the number of time series pairs ( t,y).

26
The values of a and b obtained on solving the above conditional equations provide a
minimum of E discussed above.

Further,
∑ (Y-a-bt) = 0 ⇒ ∑ (Y-Ye) = 0

Hence the least square trend line is obtained so that:

∑(Y-Ye) = 0 ⇒ ∑Y = ∑Ye
i.e the sum of the given values and the sum of trends values are equal , and

∑(Y-Ye)2 is minimum

where Y is the observed time series value and Ye is the corresponding trend value given

by the trend line

Y = a + bt

The straight-line trend implies that irrespective of the seasonal and cyclical swings and
irregular fluctuations, the trend values increase or decrease by a constant absolute amount
‘b’ per unit of time. Thus, if we are given the yearly figures for a time series, then the
coefficient ‘b’ in the equation Y = a + bt , which is nothing but the slope of a trend line,
gives the annual rate of growth.

After obtaining the trend line by the principle of least squares, the trend values for
different years can be obtained on substituting the values of time t in the trend equation.

27
 CHAPTER 5

EXAMINATION OF STOCK
MARKET TRENDS

28
 EXAMINATION OF STOCK MARKET TRENDS

This section examines the variations in stock markets in both India and China caused due
to some of the economic policies and lot of other factors influencing the stock markets.
How the stock markets have dealt with external shocks and the performances of the
economies have also been discussed.

INDIA IN 2001
Trend for 2001
1200
1150
Stock Indices

1100
1050
1000
950
900
850
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Series1
Months

The main highlights of this year are characterized by high growth rate in the agricultural
sector and deceleration in the industrial sector due to lack of infrastructure, high interest
rates, power and transportation delays etc.

The fluctuation in the stock market has been one of the consequences of the September
11, attack in the US and terrorist attack on the Parliament of India in December. However
recovery of the stock market was gained by some measures followed by the Government.
SEBI also introduced some policies, which brought in more transparency in the capital
and money market sector, which boosted the performance of the stock markets.

29
The statistics provided by economic survey conducted by the Ministry of Finance,
Government of India supports the above analysis.

The GDP growth of 5.4 percent in 2001-02 is supported by a growth rate of 5.7 percent in
agriculture and allied sectors, 3.3 percent in industry and 6.5 percent in services. The
acceleration of the overall GDP growth rate is basically due to a significant improvement
in value added in the agriculture and allied sectors from a negative growth rate of (-) 0.2
percent in 2000-01 to 5.7 per cent in 2001-2002. There has been significant deceleration
in the growth rate of industry. However, the performance of the services sector has
improved moderately

INDUSTRIAL OUTPUT:

The growth of manufacturing reduced from 6.7 to 3.3 percent. This deceleration in
industrial growth may be attributable to various factors such as normal business and
investment cycles, inherent adjustment lags of corporate restructuring and lack of both
consumer and investment demand. Continued high real interest rates, infrastructure
constraints in power and transport and delays in establishing credible institutional and
regulatory framework for private participation in some key sectors might have also
dampened private investment and industrial production. Industrial slowdown has been
observed across all major sectors. The manufacturing sector grew by only 2.4 percent
during April-December 2001, much lower than the 6.0 percent growth registered during
the same period in 2000.

SERVICES:

Software and IT enabled services have emerged as a niche sector for India in the global
context. The software industry has been one of the fastest growing sectors in the last
decade with a compound annual growth rate exceeding 50 per cent. Software service
exports increased from US $ 4.02 billion in 1999-2000 to US $ 6.3 billion in 2000-01,
thereby registering a growth of 57 per cent. India’s success in the software sector can be
largely attributed to the industry’s ability to cultivate superior knowledge through

30
intensive R&D efforts and the expertise in applying the knowledge in commercially
viable technologies.

CAPITAL FORMATION:

In recent years growth in real gross domestic capital formation (GDCF) has shown
instability. The growth rate of real GDCF recorded a significant deceleration from 15.7
per cent in 1999-2000 to 2.0 per cent in 2000-01 This to a large extent reflects volatility
in the behaviour of stocks/inventories. Growth in real gross fixed capital formation
(GFCF) has been more stable, but it also slackened from 8.6 per cent in 1999-2000 to 4.7
per cent in 2000-01.The change in stocks measured as percentage of GDP at 1993-94
prices fell from 1.8 per cent in 1999-2000 to 1.1 per cent in 2000-01.

FIIs:

Except for September 2001, the net FII investment was positive during the first ten
months of the current year. Net FII investment amounted to US$1,295 million during
April 2001-January 2002 compared to US$1,379 million during the corresponding
previous period. The uncertainty and panic resulting from the terrorist attacks on the USA
led to sudden increase in sales, which exceeded purchases by about 16 per cent. As a
result net investment by FIIs declined by US$113 million in September 2001.

STOCK MARKETS:

The pronounced bearish sentiments in the stock market saw the Sensex falling to 3184
on April 12, 2001, which implied a cumulative fall of 36.3 per cent from 5001 at the end
of March 2000. The National Stock Exchange (NSE) Index (S&P CNX Nifty) also
suffered a similar slump during this period. The decline in equity prices in leading stock
markets abroad following the terrorist attacks on the USA on September 11, 2001 led to
further squeezing of the stock indices at home. The Sensex dropped to 2600 on

31
September 21, 2001, registering a fall of more than one thousand points from 3604 on the
eve of the current financial year.

The measures taken by both the Government and the regulatory authorities in the wake of
the September 11 crisis, backed by improvement in investor sentiment abroad, facilitated
significant recovery in the stock market. However, the market again came under selling
pressure, precipitated by developments following the terrorist attack on the Indian
Parliament on December 13, 2001. Stock market prospects improved in the 2002.

MEASURES TAKEN FOR IMPROVEMENT IN THE CAPITAL AND

MONEY MARKETS:

The developments in the stock market on the eve of the current financial year brought to
the fore the need for further measures aimed at promoting safety, transparency and
efficiency of the capital market. Accordingly, the following measures were announced in
March 2001:

Intention to corporatise stock exchanges involving segregation of ownership,

management and trading membership from each other.

Extension of rolling settlement to two hundred “A” category stocks in Modified

Carry Forward Scheme (MCFS), Automated Lending and Borrowing Mechanism
(ALBM) and Borrowing and Lending Securities Scheme (BLESS) by July 2, 2001.

The formulation of legislative changes aimed at further strengthening the provisions

in the SEBI Act, 1992 for ensuring investor protection.

The SEBI subsequently extended rolling settlement to all scrips included in the
ALBM/BLESS/or MCFS in any stock exchange or in the BSE 200 list with effect from
July 2, 2001. From December 31, 2001, all stocks are under rolling settlement in all stock
exchanges. This has been one of the most far-reaching reforms in the history of India’s
capital market. Equally important were the widening of the spectrum of equity
derivatives to trading in options on both indices and stocks, and to stock futures, which
can perform hedging functions hitherto performed by the deferral products.

32
 CHINA IN 2001

Trend for 2001

250
Stock Indices

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Months

China’s economy has remained stable despite the Asian financial crises and September
11 terrorist attack on the USA. Tax reductions were introduced in the country as a
response to the Asian financial crises. WTO accession by the Chinese provided impetus
to the growing economy. Organizations were established in China to disseminate
information and help a lot of business units access newer markets and enhance
productivity and thereby, profitability. The domestic consumption and investment rose
considerably in this year. The slow pace of US economy affected the Chinese economy
considerably.

Details of the Economy are provided by survey conducted by some of the economists,
excerpts of which are provided below.

Encouragingly, China has staged a strong rebound from the Asian financial crisis. The
remarkable 10.5% real GDP growth in 2000 demonstrated again China’s economic
vibrancy and competitiveness.

33
INDUSTRIAL OUTPUT:

China's industrial output growth picked up in the first two months of the year, rising 10.9
percent in January and February over the previous year, higher than the 10.2 percent
growth recorded for the corresponding period in 2001. China's economic growth last year
was 7.3 percent, compared with eight percent in 2000, as its export sector was affected by
global weakening in demand. Overall exports of industrial products gained 12.8 percent
in the first two months

CAPITAL FORMATION:

External capital has played a significant role in China’s restructuring. The inflows of
foreign direct investment into China have been dramatic. From virtually zero at the end
of the 1970s, FDI reached over US$ 50 billion in 2002, making China the second largest
recipient in the world (after the United States). However, the magnitude of FDI can over-
stated: it was still only about 10 per cent of China’s gross capital formation in 2001.

So despite large inflows, China is not overly dependent on external capital. Its high gross
domestic capital formation, at 38 per cent of GDP in 2001, explains much of its
impressive growth record. Also, China has maintained tight controls over portfolio.

China has enjoyed a rather broadly based recovery in 2000 well supported by both
external and domestic demand. While merchandise exports surged 17%, service exports
rose 14.3%. At the same time, domestic consumption and investment recorded 5.4% and
8.8% increases respectively. The IMF, in its recent assessment, also endorsed a more
stable growth projection as well as the economic policies of China

STOCK MARKETS:

The semi-annual report by the WB thought that China's stock market had achieved
impressive progress as a result of stringent governance and extensive debates conducted
on problems found in stock market. Present China stock market has more than 50 million
individual investors. In recent days, market manipulation and fraud exposed by the media

34
had aroused intense complaints from the public thereby attracted more attention to the
companies in straightening the structures. Currently, the structures of the companies have
been given the first priority for considerations by the governments at different levels.
China Securities Regulatory Commission (CSRC) particularly decided to frame
mandatory criteria for listed companies in line with the principles governing stock market
operation put into effect in November 2000.

investment and loans in order to guard against instability. Consequently, FDI accounts for
over 70 per cent of total foreign capital inflows.

MEASURES FOR IMPROVEMENT:

China's impending WTO accession provides new opportunities for Hong Kong
companies in the domestic market of the mainland. The expected rises in various flows -
goods, capital or people, between China and the rest of world associated with its WTO
accession will further strengthen Hong Kong's status as a metropolitan economy and the
leading service hub of the region.

The Hong Kong Trade Development Council (TDC) is obliged to enhance its supports to
Hong Kong's small and medium-sized enterprises (SMEs). As asked by the Financial
Secretary, TDC will provide SMEs with more market information and advice on doing
business on the mainland. We will undertake studies on the distribution and import
channels of the PRD. Moreover, they set up a China Business Advisory Unit to provide
Hong Kong companies with face-to-face advice on doing business in the Southern China
region.

Hong Kong's public and the international business community are expected to welcome
the just released budget which follows closely the principle of prudent management of
public finance, and proposes no major changes in taxes.

The government skillfully injected certain fiscal stimulus during the Asian crisis period.
But as the economy returns to a more sustainable trend growth, the government should
refrain from unwarranted fiscal measures. In this regard, few tax cuts are introduced..

35
This is a reflection of the government's commitment to prudent fiscal management and its
determination in complying with the principle as stipulated in the Basic Law.

36
 INDIA IN 2002

Trend for 2002

Stock Indices 1100

1050

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950

900
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Series1
Months

A favorable tax regime and easy and cost-effective access to technology has led to the
growth of many industries such as Information technology, cement, steel, textiles etc. The
outflow of portfolio investment from India caused some amount of trouble to the
economy. Severe drought in the country also contributed to the slow progress of the
economy. SARFAESI Act and lot of other Acts were passed in this year to revive the
economy. A significant reform in this year was the dismantling of the administered price
mechanism for petroleum products.

One important area of policy focus has been the resolution of failure, or the creation of
swift and efficient mechanisms through which labour and capital in failed firms can be
reutilised as efficiently as possible. This is closely related to the problem of creditors
rights. Initiatives like the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Bill, 2002, giving creditors the ability to seize collateral
when a loan becomes delinquent, and amendments made to the Companies Act, which
are likely to improve the working of the BIFR, can significantly reduce the loss of output
associated with failed firms. In December 2002, the Competition Bill 2001 was passed in

37
Parliament. This seeks to establish a pro-competitive legal framework, contain anti-
competitive practices and abuses of dominance and yield better regulation of markets.

INDUSTRIAL OUTPUT:

Two industries, which have experienced striking revivals in the current year, are steel and
cement. World steel prices rose from December 2001 onwards. Domestic demand for
steel and cement was supported by the highway construction, taking place under the aegis
of NHAI, and housing sector growth spurred by easy access to housing finance and a
favourable tax regime. Improvements in technology and cost reductions have made India
more competitive in exporting steel and cement. For these reasons, steel output grew by
19.8 percent in 2001-02, and a further 24.5 percent in April-November 2002. In the first
half of 2002-03, cement production grew strongly by 9.5 percent.

The textile industry is a key area where India has an opportunity for labour-intensive
exports. Textile products showed a strong growth of 14.8 percent in April-November
2002. A key element of this growth was an increase of 11.6 percent in exports of
readymade garments in dollar terms. The powerloom segment accounted for most of the
growth in fabrics

In the oil and gas industry, a significant development is gas discovery in new blocks.
Preliminary estimates of the in-place reserves from the recent discoveries in the Krishna-
Godavari offshore, and in the Rajasthan block, are about 220 million metric tonne
(MMT) of oil and oil equivalent gas. In late 2000-01, there was enough refining capacity
in India relative to domestic demand, to result in India exporting petroleum products in
net terms of 3.08 million tonnes in 2001-02, and 2.08 million tonnes in April-October
2002. In addition, three new refineries, adding up to a capacity of 24 million tonnes, are
under construction. Natural gas production rose to 20.61 billion cubic metres (BCM)
during the current year (April-November 2002), which was 4.2 percent higher than that in
the corresponding period of last year. To enhance the natural gas availability in the
country, eight coal bed methane (CBM) blocks have been awarded in the first round
under the National CBM Policy.

38
Inspite of the slower growth of money supply, the current year has been characterised by
easy liquidity conditions.

SERVICES:

The services sector, the most consistent performer in recent times, maintained its growth
momentum in 2001-02, as well as in the first half of the current year. Trade, hotels,
transport & communications, and financing, real estate & business services, improved
their performance in 2001-02 over 2000-01. In the current year, on a year-on-year basis,
in terms of GDP, the services sector registered a growth of 7.6 percent in the first and
second quarters, respectively

India continues to make progress on export-oriented production in electronics and

computer technology. Software exports have grown at a compound growth rate of over
50 percent per year for the last five years. Hardware exports grew sharply in 2000-01 and
2001-02, reaching a level of Rs.5,871 crore in 2001-02, with growth of 22.6 percent over
the previous year. Many top information technology (IT) firms from across the world
have started utilising India in their global production chains, and in high-end functions
such as research and development.

STOCK MARKET:

Capital markets continued to be subdued. The NSE-50 index, which was at 1,087 in
January 2002, was at 1,073 in January 2003, showing no significant change. This
weakness in the secondary market led to a small volume of issuance on the primary
market. However, the drop in the Indian equity market in the period after December 2001
is smaller than that in many other countries. Unlike the heavy inflows in the preceding
years, there was a small outflow of foreign portfolio investment from India between April
to November 2002.

39
The subdued conditions in domestic capital markets, however, conceal important
structural reforms. The equity market absorbed a new market design, with rolling
settlement and equity derivatives trading. Liquidity, which was adversely affected in July
2001, has bounced back to strong levels from March 2002 onwards. In 2001, two Indian
exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), ranked
third and sixth among exchanges all over the world, sorted by the number of transactions.

STRUCTURAL REFORMS:

A significant reform in the current year was the dismantling of the administered price
mechanism for petroleum products from April 1, 2002, exactly as per the schedule
announced in 1997. Reforms picked up speed in the third quarter of the current year.

The winter session of Parliament saw the passage of several important Bills, including
Securitisation and Reconstruction of Financial Assets and Securities Bill, 2002, the
Securities and Exchange Board of India (Amendment) Bill, 2002, the Unit Trust Of India
(Transfer of Undertaking and Repeal) Bill, 2002, Prevention of Money Laundering Bill,
2002, the Companies (Amendment) Bill, 2002, the Companies (Second Amendment)
Bill, 2002 and the Competition Bill, 2001. The announcement about the disinvestment
strategy for Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum
Corporation Limited (HPCL), in December 2002, cleared the uncertainty over
privatisation.

40
 CHINA IN 2002

Trend of 2002
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Months

During 2002, there was renewed vigor in investment, stimulated by post-WTO private
capital spending as well as public investment in the government's stimulus program. Both
imports and exports grew sharply, and China emerged as the favorite destination for
foreign direct investment. Foreign exchange reserves rose, reaching almost 12 months of
import cover, and the external surplus continues to hold. Debt, though growing, is still
low by international standards. However the nation was widely affected by SARS, the
epidemic. The consequences being poor growth rate in some of the most profitable
sectors such as tourism, hotel industry etc…….

Official statistics show the economy growing by 8 percent, led by continued strength in
the industrial and services sector. Output rose at an even faster rate of 9.9 percent in the
first quarter of 2003, although this is unlikely to last given the effects of the SARS
epidemic on some of China's regions and in neighboring countries.

The sectoral pattern of this growth is relatively unchanged .However, the performance of
the primary sector, mainly agriculture, continues to improve. This is significant in as

41
much as 2002 was characterized by poor rainfall, drought, and the first year of liberalized
agricultural imports after China joined the WTO. It reflects in part the ability of some
farm households to diversify production away from grain to higher value added activities.

The problem with under-valuation of China's services sector output still exists. While the
sector grew by 7.3 percent in 2002, compared to 7.4 percent the previous year, it is
believed that some services growth is recorded in the manufacturing statistics, reflecting
the high degree of vertical integration of economic activities that exists within Chinese
firms, especially the state-owned enterprises (SOE).

INDUSTRIAL OUTPUT:

Value-addition in the manufacturing industry recorded its highest increase since the
Asian financial crisis, led by foreign-funded enterprises feeding the domestic boom in
demand for industrial products as well as consolidating production in China for expanded
sales in other markets. This strong performance has continued into 2003, with industrial
growth during the first quarter of 17.2 percent.

The role of automobile production-an increase of 55 percent during 2002-is receiving a

lot of attention. Many analysts and some officials identify this industry segment and its
ancillary industries as a potential leading sector in the future industrial development of
China. Unfortunately, imports are also rising fast-82 percent in 2002

Another focus of attention in the industrial sector is the growth of China's exports of light
manufactures and household goods in 2003, which the SARS epidemic centered on
Guangdong and Hong Kong is likely to affect. The Pearl River economy accounts for
nearly $90 billion of exports and 10 percent of the output of China

SAVINGS

The savings deposits of the Chinese people also increased in 2002. By the end of
November, total savings deposits had reached 8.57 trillion yuan, 1.2 trillion yuan more
than that by the end of last year.

42
FOREIGN INVESTMENTS:
China's utilized FDI would probably top USD50bn for the first time, overtaking the US
as the largest recipient of FDI inflows for the first time. The Ministry of Foreign Trade
and Economic Corporation reported that utilized FDI in 2002 reached USD52.7bn, up
12.51% .

43
 INDIA IN 2003

Trend in 2003

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Months

The year 2003 witnessed an upward trend in the stock market due to satisfactory growth
in all major sectors of the economy. Good monsoons have led to an increase in the
agricultural yield. The GDP of the country grew by 8.1% due to better agricultutal
performance and industrial output.

Growth acceleration particularly in the 1990s is on account of a significant step up in

growth of services. Services growth of 7.8% during the 1990s, up from 6.1% during
1980-91 and 2.7% during 1950-79, is significantly higher than growth in agriculture and
industry .Industrial growth has also increased over time, and exceeds the rate of growth in
agriculture. These variations in trend growth across sectors have led to a major change in
the structure of the economy. The share of services in GDP increased from 27.9% to
50.8% between 1950-51 and 2002-03. The increase in the share of industry was more
modest from 14.7% to 27.1%. There was a decline in the share of agriculture from 57.4%
in 1950-51 to 22.1% in 2002-03. This built-in process of a rising share of the faster
growing sectors in the structure of the economy has reinforced the process of growth
acceleration

44
INDUSTRIAL OUTPUT:

During 02-03 automobile production grew by 15.1%. Commercial growth witnessed a

sharp growth of 35.1%, while passenger cars grew by 38.3%. A major development in
the Indian manufacturing has been the success in exports of automobile components and
finished vehicles. The export of vehicles grew by 56% in 03-04.

The growth of commercial vehicles and passenger cars was assisted by reduction in
excise duty on passenger cars from 32% to 24%, reduction in tariffs, and improvements
in the availability of retail credit. The liberalization of the norms for foreign investment
and import of technology for manufacturing of vehicles, permission of 100% FDI under
automatic route in this sector have helped it to restructure, absorb new technologies, and
get integrated into global production chains

The industrial sector continued to register robust and broad based growth during April-
November 2003. Manufacturing grew at 6.8%, mainly on account of the high growth of
capital goods (8.8%) and consumer goods (8.1%). Except for jute manufactures, cotton
textiles, leather and leather products, and metal products, all other subsectors registered a
positive growth. Significant among these are basic metals, food products, beverages and
tobacco, transport equipment, paper and paper products, wood and wood products, and
other industries. Machinery production also registered significant improvements in
growth after growing at only 1.8% during FY2002. However, core infrastructure such as

45
petroleum, coal, electricity, cement, and steel grew at a much lower rate of 3.9% during
April-October 2003 compared to 6.5% during the same period in FY2002. This is a cause
for concern and needs close monitoring in view of the strategic importance of this sector.
Weak growth in some subsectors notwithstanding, the outlook for the industrial sector as
a whole remains buoyant, supported by strong growth in consumer demand, low interest
rates and improvements in corporate profitability.

SERVICES:

Growth in services is much more stable than in agriculture and industry. Consequently,
the rising share of services in GDP implies that growth volatility is also declining over
time in the economy. Turning now to the short-term sectoral outlook for the current year,
strong growth in FY2003 is again being led by the services sector. Services growth of
9.9% during July-September 2003 is way above 7.1% in FY2002 or even 7.6% recorded
during April-June 2003. Since services account for over half of GDP, high growth in this
sector alone will likely contribute 68% of GDP growth. Within services, trade,
hotels/restaurants, transport and communications registered the highest growth rate at
11.9% during the second quarter, with growth in social, community and personal
services, including public administration and defence, and financial services, real estate
and business services including software, rising to 8.9% and 7.3% respectively. A recent
IMF study suggests that growth acceleration in the services sector is on account of high
income elasticity of demand, user industry demand and rising exports in addition to
reforms and technological advances.

FOREIGN INVESTMENT:
There was an outflow if foreign institutional investment in this year when compared to
considerable amount of inflow of investment in the previous years. SEBI has reported 68
million USD outflow of FII.

46
 CHINA IN 2003

Trend for 2003

125
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100
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Months

The economy of China went through a sharp gyration during 2003, with an abrupt
setback caused by the spread of severe acute respiratory syndrome (SARS) in the second
quarter followed by a speedy and broad based recovery in the third and fourth quarters.
On a year on year comparison, the gross domestic product (GDP) went up by 4.4 percent
in real terms in the first quarter, relapsed to a 0.6 percent decline in the second quarter,
and then rebounded to distinct growth at 4.0 percent and 4.9 percent respectively in the
third and fourth quarters. For 2003 as a whole, GDP still grew appreciably, by 3.2 percent
in real terms, better than the 1.9 percent growth in 2002.

Externally, Hong Kong, China's, total exports of goods attained a robust growth of 14.0
percent in real terms in 2003, on the back of hectic growth in the Chinese economy and a
pick up in the global economy after the conflict in Iraq. Exports of services grew
appreciably, by 7.1 percent in real terms, in 2003, upon sustained robust offshore trade
and a strong rebound in inbound tourism after the setback caused by SARS in the second

47
quarter, especially so after the launch of the Individual Visit Scheme for Chinese visitors
in late July.

Interest rates have fallen notably below US dollar rates since August 2003, reflecting
increased fund inflows upon improved market sentiments about the economic outlook.
The three-month interbank rate decreased from 1.41 percent at end-2002 to 0.07 percent
at end-2003, while its spread over the US dollar counterpart dropped from 9 basis points
to -104 basis points. Domestic interest rates started to rise in April 2004 as the US
Federal Reserve moved to tighten monetary policy.

INDUSTRIAL OUTPUT:

Industrial production in February was projected to be 15 percent but the actual figure shot
up to 19.8 percent. Industrial production is being stimulated by the government’s
investment in infrastructure, strong growth in exports and continuing domestic
investment in factories.
The service industry was however badly affected due to SARS. The tourism industry,
hotel industry and the likes suffered a severe setback during this period.

FOREIGN INVESTMENT:
China emerged as the leading destination for FDI, absorbing US$52.7 billion in inflows, a 12.5
percent increase over the previous year. They combined with the strong trade performance to
raise foreign exchange reserves from US$212.2 billion in 2001 to US$286.4 billion in 2002,
which provides nearly 12 months of import coverage.

STOCK MARKET:
The performance of China's stock market may be affected by government policies on five
aspects, market observers said Monday.

The policy on the management of state-owned assets is deemed asa major factor
contributing to the stock market this year.

48
The performance of the stock market in 2003 shows a big impact of the measures for
property right management in listed companies and large companies on the asset
reorganization among enterprises.With the deepening of the reform on the state-owned
assets management and supervision system in the new year, relevant policies are
expected to affect the operation of the stock market to some extent.

To set up the second board is viewed as an essential factor that will have an impetus to
the development of the stock market in 2004.

The Chinese authorities have decided to promote venture investment and build the second
board market, which encourages efforts to establish a multi-layer capital market system,
improve the structure of the capital market, and enrich products at the capital market.

The policy on initial public offering (IPO) and the reform of the IPO verification
commission system and guarantee system promoted by the national securities watchdog,
is expected to have a significant influence on the issue of new stocks in 2004. The new
policy, made public last month, will also help guarantee the qualifications of listed
companies at the root.

Assets management by securities firms will open a new channel for more funds to flow
into the stock market and will be conduciveto increasing institutional investors' economic
capacity.

The draft amendment to the securities law is expected to be submitted for examination
and approval to the nation's top law-making body in April this year. The law, which was
put into effectin 1999, contains some rules that are no longer compatible to the
development of the stock market, and a revised law will boost the development of the
stock market.

49
STRUCTURAL REFORMS:

Hong Kong, China, has been carrying out reforms to enhance the stability of the financial
system through improving regulatory regimes and enhancing transparency and corporate
governance of financial sectors.

• Measures have been adopted to improve the regulation and public disclosure
requirements of the securities and insurance sectors, and to improve the disclosure
of fees, charges and performance of retirement funds.

• A deposit protection scheme is expected to be implemented in 2006, to enhance

deposit protection and the stability of the banking sector.

• The sharing of positive consumer credit data, started in 2003, and the sharing of
commercial credit data of small and medium enterprises by end-2004 will
contribute to banking stability.

• Hong Kong, China, implemented the New Basel Capital Accord (known as "Basel
II") to enhance the risk-management capabilities of the banking sector.

• Initiatives under a Corporate Governance Action Plan have been taken forward to
enhance corporate governance in Hong Kong, China.

• Measures have been taken to simplify the issuance process of debt securities, with
a view to further developing the capital markets of Hong Kong, China, which
would help strengthen the resilience of the economy against volatile capital flows.

50
 INDIA IN 2004

Trend for 2004

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Months

The performance of the Indian economy in 2004-05 so far has exceeded expectations
formed at the beginning of the year. Buoyed by a rebound in the agriculture and allied
sector, and strongly helped by improved performance in industry and services, the
economy had registered a growth rate of 8.5 per cent in 2003-04. Deterioration in the
benign world inflation environment, particularly of petroleum, coal and steel, led to
apprehensions about growth and inflation.

After a drought-induced decline of 7.0 per cent in 2002-03, the growth rate in the
agriculture and allied sector bounced back to 9.6 per cent in 2003-04. While industry
maintained the higher growth of 6.6 per cent observed in 2002-03, the services sector
improved its performance significantly from 7.9 per cent in 2002-03 to 9.1 percent in
2003-04. Growth in the industry and services sectors in 2003-04 was broad-based with
manufacturing, public utilities, the trade, hotels, transport and communication group, and
community, social and personal services recording higher growth than that in the
previous year.

51
INDUSTRIAL OUTPUT:

Consequent to liberalization, the arrival of new and contemporary models, easy

availability of finance at relatively low rate of interest and price discounts offered by the
dealers and manufacturers appear to have stimulated the demand for vehicles and a strong
growth of the industry. 7.5 The progressive liberalization of the norms for foreign
investment and import of technology appear to have benefited the automobile sector with
production of total vehicles increasing from 4.2 million in 1998-99 to 7.3 million in
2003-04. It is likely that the production of such vehicles will exceed 10 million in the
next couple of years. The global standards achieved by the industry have manifested in
the increasing exports of the Industry.

SERVICES:
Service sector accounts more than half of India's Gross Domestic Product. The rise in
service sector's share in GDP marks a structural change. Reason for high growth rate in
service sector in India is liberalization in regulatory framework. That gives rise to
innovation and high export earnings. The growth rate of India's service exports in 2002
was 8% with regards to 5% Worldwide. India is ranked 21st among exporters of services.

India'S IT Market reached a turn over of US$ 16.2 billion in 2004-05. The IT Sector
employs 697,000 people and this is likely to reach 2 million by 2014. IT Companies are
expected to account for 8-10% of GDP by 2008 from 1.4% in 2001. India is considered
as a global player in Information Technology with software exports of US Dollars12
billion in 2003-2004 and $ 17.2 billion in 2004-2005. The revenue from exports of IT and
related services is expected to reach US$ 57 billion by 2008.

Outsourcing Industry has changed the image of India. Western companies are continuing
to eye India as their top destination for outsourcing work. Rapid increase in the profits of
several Indian outsource service providers including two of top companies like Tata
consultancy services and Infosys Technology.Mumbai based Tcs has risen by 20.5% and
bangalore based Infosys recorded a 36% rise.

52
The BPO Sector has been growing at 60-70% annually and its turnover in 2004-05
reached US$5.8 billion from US$565 million in 1999-00. It is projected to increase to
US$ 12.3 billion by 2006 and create employment opportunities for a million people from
its current level of 200000.

India's Consultancy Professionals possess capability and capacity to provide expertise

especially suitable for developing countries. In addition it also offers consultancy in
sophisticated areas like information technology, advanced financial and banking services
etc.to developed countries like USA, UK, France, West Germany and Australia..

Expertise offered by Indian consultancy professionals covers areas like infrastructure,

Economic& Social Sector, Water Resource Dam, Flood Controll, Irrigation, Rural
Development, Environment, Industries, Computer, Training of personnel and transfer
technology.

India's health services (with highly qualified and experienced personnel), super-specialty
hospitals specializing in both modern and traditional Indian medical systems (like
Ayurveda, Unani, Siddha and nature- cure) supported by state-of-the-art equipment, are
attracting patients from across the world, and constitute a larger portion in India's
services sector.

During the year 2003-04, the tourism industry registered a growth of 17.3 per cent
in foreign tourist arrivals compared to the modest growth of 1.0 per cent registered in
2002-03.

FOREIGN INVESTMENT:
Aggregate FDI inflows into India were somewhat lower during 2003-04 as compared to
that during 2002-03 .The reduction is attributable to a small decline (US$379 million) in

53
fresh equity capital inflows in 2003-04. Reinvested earnings during 2003- 04 at US$1.8
billion were more or less the same as in 2002-03. FDI flows into India, on BOP basis,
after rising sharply from 1999- 2000, have been showing a decline since 2001-02. FDI
undertaken by Indian enterprises overseas, was also lower at US$1.3 billion during 2003-
04, compared to US$1.8 billion in 2002-03.

Aggregate FDI flows into India during April-September 2004-05 are estimated at almost
70 per cent of such flows during the whole of 2003-04, thereby indicating a turnaround in
the current year. Notwithstanding the upturn, India’s capital account in recent years has
gained far more strength from short-term portfolio flows than from long-term FDI flows.
This probably necessitates revisiting the FDI policy and identifying constraints impeding
higher FDI inflows. Procedural simplifications are likely to encourage much greater FDI
flows.

STOCK MARKET:

The equity markets continued to boom in 2003-04 and in the current year so far. The top
50 stocks (Nifty) generated returns of 11 per cent in 2004, following returns of 72 per
cent in 2003. Strong equity index returns in calendar 2003 led to a revival of the primary
market in 2004. Overall public issues grew by roughly five times to Rs. 35,859 crore in
2004. The growth was concentrated in equity issues and particularly in equity initial
public offerings (IPOs).

The Nifty index, which shows the biggest 50 liquid stocks in the country, experienced a
sharp growth in market capitalisation from Rs.2,85,007 crore in 2001 to Rs.9,02,831
crore in 2004. Strong returns of 71.9 per cent in 2003 were followed by modest returns of
10.7 per cent in 2004. Index volatility in 2004 was elevated to 2001 levels, reflecting the
flow of news in these two years capitalisation, from Rs.28,498 crore in 2001 to
Rs.1,65,444 crore in 2004. Returns on this set of stocks appears to have a high sensitivity
to returns on Nifty, both in the upward and the downward direction. The volatility of this
index is somewhat higher than that of Nifty. The gap in P/E, between Nifty and Nifty

54
Junior, has been substantially closed in the period from 2001 The high growth observed
since 2001-02 in automobile production continued in the first three quarters of the current
year. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in
2003-04 was 15.1 per cent (Table 7.4).

55
 CHINA IN 2004
Trend for 2004

120
100
Stock Indices

80
60 Series1
40
20
0

v
n

n
l

c
g

p
r

ar
b
ct
ay

Ju
Ap

No
Ju

Ja
Au

Se

De

Fe
O

M
M

Months

The Chinese economy grew 9.5 percent, pushed mainly by fixed-asset investment and
exports. Government restrictions on lending and project approvals curtailed investment
growth in overheating sectors such as aluminum, cement, and steel. Over investment in
certain sectors in the first quarter of 2004 spurred government administrative action last
spring to curb lending and reduce the number of low-quality investment projects. Though
the use of administrative fiat, rather than more subtle economic levers such as interest
rate changes, was widely criticized by Western observers, it seems to be doing the job for
the time being.

Power and transportation bottlenecks also slowed the economy and are likely to continue
to do so. Bottlenecks in the economy have played an important role in the slowdown:
severe power shortages in nearly every province put factories on shortened work weeks,
particularly over the summer; the rail system routinely turns away a substantial amount of
prospective freight for lack of capacity; and a crackdown on overloaded trucks made road
transport more expensive. However, China's industrial output grew 11.5 percent in 2004
compared to 17 percent in 2003.

56
INDUSTRIAL OUTPUT:

China's industrial output rose by 17.7 per cent to 1,131.8 billion yuan (US$136.4 billion)
during the first quarter of the year, the National Bureau of Statistics said on Friday.

However Growth in industrial output continued to decline in November, due to the

central government's macro-control measures. The growth rate was 0.9 percentage points
slower than that in October

The month's industrial output grew a year-on-year 14.8 per cent to 508.4 billion yuan
(US$61.3 billion), figures from the National Bureau of Statistics indicate. The year-on-
year increase was mainly driven by six major sectors, including electronics, metals and
transportation equipment, said the Bureau.

Growth in investment, production, and the money supply has all eased in recent months,
signaling that China's economy is finally slowing, though admittedly not by much. Most
analysts believe China is in the midst of a slowdown of about 2 to 3 percent in GDP
growth.

POLICIES FOR DEVELOPMENT:

A very important stumbling block along the road toward market-based monetary
policymaking—and a precondition for liberalizing both capital flows and the foreign
exchange market—is massive reform of China's financial system, and, in particular, its
banking sector. About two years ago, China separated the supervisory functions from its
central bank, creating the China Banking Regulatory Commission. The Commission has
had to tread a fine line between improving bank conditions and not undermining the
government's economic growth targets.

This extraordinary economic performance has been driven by changes in government

economic policy that have progressively given greater rein to market forces.

57
CHANGES IN THE ECONOMY:

The transformation started in the agricultural sector more than two decades ago and was
extended progressively to industry and large parts of the service sector, so that price
regulation was essentially dismantled by 2000. While price controls were being
abolished, the government introduced a pioneering company law that for the first time
permitted private individuals to own limited liability corporations. The government also
rigorously enforced a number of competition laws in order to unify the internal market,
while the business environment was further sharpened by allowing foreign direct
investment in the country, reducing tariffs, abolishing the state export trading monopoly
and ending multiple exchange rates.

The momentum towards a freer economy has continued this decade with membership of
the World Trade Organisation resulting in the standardisation of a large number of its
laws and regulations and the prospect of further tariff reductions. In addition,
fundamental changes were made to the constitution in 2004, stressing the role of the non-
state sector in supporting economic activity in the country and protecting private property
from arbitrary seizure. In 2005, regulations that prevented privately-owned companies
entering a number of sectors of the economy, such as infrastructure, public utilities and
financial services were abolished.

Overall, these changes have permitted the emergence of a powerful private sector in the
economy. The government has also introduced wide-ranging reforms into the state-
owned sector that dominated the economy in the early 1990s. State-owned enterprises
have been transformed into corporations with a formal legal business structure and many
have been listed on stock exchanges that were created in the early 1990s. Since 1998, a
policy of letting small enterprises go and restructuring large companies has been
successfully pursued, with the number of state-controlled industrial enterprises falling by
over one half in the following five years. Employment contracts were made more
flexible, leading to job reductions in the industrial sector of over 14 million in the five
years to 2003.

58
These reforms have improved the framework for mobilizing the resources generated by
one of the highest rates of savings in any economy – the gross saving rate approaches half
of GDP – generating a particularly rapid increase in the capital stock, although such
estimates can only be approximate since there are no official estimates either of the
capital stock or of constant price estimates of expenditure components of GDP, the
absence of which complicates interpretation of economic trends. Investment has, in part,
served to raise the assets available to each worker in the business sector, so boosting the
annual growth of labour productivity to 8½ per cent in 2003. It has also been used to
create an increasingly urban society – a movement that has gone in step with a flow of
people from the land into the service and manufacturing sectors of the economy. Since
workers in agriculture have low productivity, such a movement has boosted growth
considerably.

Indeed, the changes in government polices have created a largely market-oriented

economy in which the private sector plays a key role. Precise measurement of the size of
the private sector is difficult, but a definition which considers as private all companies
that are controlled neither by state nor collective shareholders suggests that the private
sector was responsible for as much as 57% of the value-added produced by the non-farm
business sector in 2003. Even amongst larger companies in the industrial sector, the
private sector produced over half of value-added in 2003 and that share appears to have
risen even further in the following two years. Overall, between 1998 and 2003, the
progressive evolution in government policies allowed a fivefold rise in the output of
domestically-owned private companies and a threefold rise in the output of non-mainland
controlled companies;

59
 CHAPTER 6
PERFORMANCE OF STOCK
MARKETS

60
 PERFORMANCE OF STOCK MARKETS

To achieve the second objective of determining the volatility between the Chinese market
and the Indian markets, the following procedure has been followed.

Volatility is determined by computing the standard error of the estimates after the
derivation of the least squares equation.

Historical data from NSE and SSE was collected for the study. Monthly indices ranging
from January 2001 to December 2005 were considered. Taking time as the independent
variable and stock indices as the dependent variable, least squares equations were
derived.

The equation in the case of Shanghai Stock Exchange of China is

Y= 115.9453 - 0.9478 (X)

The negative value of b indicates slow or negative rate of growth in the Chinese stock
market over the years.

Further the standard error of the estimates computed using the above equation is

Std. Error = 21.0254

61
The equation in the case of National Stock Exchange of India is

Y = 1605.056 + 31.0745 (X)

In this case b has a positive value, which indicates a positive rate of growth in the Indian
stock market over the years.

The standard error of the estimates computed using the this equation is

Std. Error = 327.3754

The standard errors of both the equations are further tested for their significance using ‘f-
test’ which is used to test the variables.

The object of ‘f-test’ is to find out whether the two independent estimates of population
variance differ significantly. If calculated value of F is greater than the table value then
the F ratio is considered significant and the null hypothesis is rejected.

The hypothesis for this purpose is as follows.

Ho: There is no significant difference in the standard errors

H1 : There is a significant difference in the standard errors.

Level of Significance – 5%

F (cal) = 15.56387
F (tab) = 1.50

Since the calculated value is much higher than the tabulated value, the null hypothesis is
rejected. Therefore the alternative hypothesis is accepted which says that there is a
significant difference in the standard errors of the equations.

62
The stability of the markets can be tested by determining the proportion between the
standard deviation and the mean of the observations. This test gives us the co-efficient of
variation in both the countries.

Therefore

C.V of NSE = 41.24%

C.V of SSE = 33.89 %

Since the co-efficient of variation for NSE is higher than the co-efficient of variation for
SSE, it implies that there is consistency in the Shanghai Stock Exchange when compared
to National Stock Exchange. So the Shanghai Stock Market of China is considered to be
more stable than National Stock Exchange of India

63
CHAPTER 7
CONCLUSIONS

64
 CONCLUSIONS

The Chinese economy has been growing at a very fast pace due to the reforms brought
into the country post-liberalization. The business environment was sharpened by allowing
foreign direct investment in the country, reducing tariffs, abolishing the state export
trading monopoly and ending multiple exchange rates. They encouraged the domestic
players to compete among each other to rise up to international standards.

Their investment in infrastructure has made it an ultimate destination for foreign

investors. Currently China is contemplating on extensive reforms in the banking sector
after having made manufacturing as their core competency. The major drawback in China
is non-usage of English Language which is considered as a universal language.

The Indian economy when compared to China has been growing at a very slow pace.
Growth in agricultural sector still mainly depends on monsoons. The rate of industrial
growth also is not very satisfactory though it has grown considerably. The core
competency of India has been the Information Technology and pharmaceutical sector.

India needs to mainly invest in infrastructure development. Also the public needs to be
educated on matters such as need for saving and investment. Methods need to be devised
on increasing the productivity of Indian labor. Exports need to be encouraged in the
country. More needs to be done to induce industries to match up to international
standards. Access to information, technology, finances and such other things need to be
greatly taken care of. Dissemination of these is very important for the growth of any
economy.

65
 BIBLIOGRAPHY

www.nseindia.com

www.downloadquotes.com

www.indiabudget.nic.in

www.oecd.org

www.english.people.com

www.eldis.org

www.chinaembassy.org.in

“Statistical Methods” by S.P. Gupta 13th Revised Edition 2001

66