Arjun Divecha Chairman of the GMO Board yesterday published an interesting white paper titled Ruminations on China and India (free registration required)

An interesting point argued in the paper:

“That, in a nutshell, is the relative case for China vs. India. China succeeds if the government gets it right; India succeeds if the government gets out of the way. Both could happen. Or neither. In both cases, long-term return to investors will depend not so much on the success or failure of the country in GDP terms, but on the ability of companies to deliver high return on capital.”

An unexpected conclusion:

“Nevertheless, India has one considerable advantage from my point of view: its business model is based on bottom up capitalism. Of course, anything is possible in the short run, but it seems inconceivable to me that state-directed investment policies could produce sustainable higher return on capital than those chosen by individual profit maximizers.”

The paper ends in classic value investing style:

In short, don?t focus on growth. Focus on profitability. Obviously, as value investors, the single most important thing we look at is valuation ? we are willing to pay a premium for profitability, but not to overpay for it.

Current positioning. At this point in time (January 2011), we are heavily underweight both India and China in our Emerging Markets Strategy, due primarily to high valuations in both countries relative to other emerging markets.

In addition, in both countries, the central banks appear to be behind the curve and they will have to act strongly to bring inflation down, a task that is made much harder by the profligate monetary policies of the developed markets, particularly the U.S.

Good stuff worth your time.