Should you invest client money in India or China? The two countries are running neck and neck in the developing Asia economic race.

The gross domestic product is expected to grow 9% in India and 8.9% in China in 2011, according to an April 2011 poll by the Economist magazine. Last year, India won by a nose, registering GDP of 10.4% to China's 10.3%.

Both economies have outperformed all developing Asian countries by more than 2% annually in GDP over the past few years. Meanwhile, McKinsey & Company in San Francisco, and the World Bank in Washington, D.C., estimate the middle classes of both countries will together tally well over 1 billion by 2025.

The growing middle-class consumption in India prompted the Wasatch Group of Funds in Salt Lake City, to launch the Wasatch Emerging India Fund in April. Fund co-manager Ajay Krishnan says the timing for the fund is right. India is a $4 trillion economy that is expected to grow 8% annually over the next five years. He's investing in small and midsize consumer companies that offer high returns on capital and expanding operating margins. These include HDFC Bank; Bata India, a shoe company; and the British-owned drug company GlaxoSmithKline Pharmaceuticals Ltd. The earnings of the fund's holdings are growing at double-digit rates.

"In India, 65% of the publicly traded companies are involved in domestic production," Krishnan says. "Small Indian companies are directly tied to the local economy and growing middle class. The government is pro-business."

Fast economic growth, however, does not always translate into higher stock prices. Both India and China face rising inflation that could destabilize their economies.

An April International Monetary Fund report stresses that accelerating credit demand, rising commodity and food prices and double-digit increases in real estate prices are leading to higher core inflation in Asia-particularly in India.

The IMF projects that inflation will hit 5% in China and 7.5% in India this year. Overall, developing Asia should experience 6% inflation in 2011.

Based on some accounts, however, China's inflation may be higher than anticipated. "The Chinese authorities seem to be stepping on the accelerator and the brakes of their economy at the same time," says Great Neck, N.Y.-based economist Edward Yardeni. "Minimum wages were raised 15% to 20%.

Chinese workers ... are starting to buy more with their higher salaries. That's contributing to higher prices for commodities, such as cotton and oil. [But] the Chinese authorities are so anxious about inflation that they declared that Unilever had broken the law when it spread information about impending price increases and disrupted markets. The Anglo-Dutch company was fined $308,000."

Financial advisors can't judge the stock market growth of the country by just looking at GDP numbers. The lack of a civil law infrastructure like the one in the United States is a problem, particularly when it comes to intellectual property rights and fraud.

Demographic information from the World Bank and the United Nations shows these countries also need more social and economic policy reforms. For example, life expectancy in India is just 64 years old. In China, it's 74. The mortality rate for children under 5 years old is 66 per 1,000 in China and 19 per 1,000 in India. The average number of years of schooling in India is 4.4 while it's 7.5 in China. Meanwhile, the World Health Organization reports that food safety is a serious problem.

"It's like the beginning of the U.S.'s industrial revolution and all the problems that came with it," says Kate Laskowitz-Weingart, a Purdue labor relations professor emeritus, who has taught at the University of Beijing.

The literature coming from Asia is very similar to American novels written by Upton Sinclair and Theodore Dreiser that focus on U.S. economic struggles at the beginning of the 20th century, published reports have indicated. Despite the challenges, investors expect rising wages, increased domestic demand and exports to accelerate business growth.

Gregg Wolper, an analyst with Morningstar Inc. in Chicago, says fund managers are finding good values in India's consumer goods, electric power and financial companies. "Many fund managers remain attracted to India," he says. "That is not surprising, given the country still has a rapid growth rate and is home to global leaders in fields such as outsourcing and steel." Portfolio managers with China holdings typically invest in financial, telecommunications and energy stocks because they are the most widely traded securities, he adds.

Rajiv Jain, manager of the Virtus Foreign Opportunities fund, has 24% of his assets in India, compared with 10% in China. "The problem is that good businesses are not listed in China," he says. "Listed companies are state-owned enterprises, and the price valuations are risky."

Government-controlled Chinese companies, he explains, are more interested in employment than in enhancing shareholder values. Jain says he invests in companies that have strong franchises and earnings growth of more than 20% annually. In India, he owns companies that don't face competition from the large foreign companies doing business in the region. That's put him into companies such as ITC Limited, which has 70% of the country's tobacco market; HDFC Bank, which has 20% of the country's private bank market share; and Bharat Heavy Electricals Limited, India's largest engineering and manufacturing company.

"India's growth is internally driven, so it is less dependent on demand from developed markets," he says. "India companies offer diversification that is unlike that offered by other countries."

Rusty Johnson, co-manager of the Harding Loevner Emerging Market Fund, agrees that there are more investment opportunities in India than China. Only about one-third of India's companies are government-controlled, while two-thirds of China's firms are. But China's financial markets are three times larger, broader and more liquid than India's.

"India has more potential than China because they are starting at a lower capital base," Johnson says. "India is growing its consumer businesses, auto and cement tonnage production and infrastructure spending. They are catching up with China. The income differential is high in China, but India is catching up."

India companies he favors have fast-growing earnings above 20% annually. They include Dabur Inc., a health and beauty products firm; Bajaj Auto, the nation's No. 2 motorcycle manufacturer; and Ambuja Cements Limited, a low-cost cement producer that has port facilities.

In China, he favors companies with strong domestic growth, such as New Oriental Education & Technology Group, which provides English training to affluent families' children; Tencent Inc., China's largest social networking site; and Shandong Weigao Group, a low-cost producer of medical supplies.

Other money managers favor China over India. Taizo Ishida, manager of the Matthews Asia Growth Fund, has just 3% of his assets in India and 25% in China. The rest is invested in other countries in the region. He says he trimmed his India holdings because he didn't like the nation's corporate bribery scandals. And he is less sanguine about China than other Pacific markets.

China's stock market "isn't doing well because there are concerns about price controls, inflation and government issues," he says. "You can get better diversification by investing throughout the entire region than investing in just India or China."

The companies he owns in China are high quality with transparent accounting information, he says. He favors consumer stocks like Tingyi Holding Corp., a noodle manufacturer, and Ctrip.com International Ltd., a high-end business travel company. Both firms are growing earnings at more than 20% annually.

The International Monetary Fund's "World Economic Report," released in April, paints an encouraging portrait of both China and India, as well as the rest of Asia. "Broad-based recovery is continuing in most Asian economies, supported by strong export performance, buoyant private domestic demand, and in some cases rapid credit growth," the report says.

On the plus side, infrastructure will be a major contributor to economic growth in both India and China. Anoop Singh, director of the IMF's Asia and Pacific Department in Washington, D.C., says India's capital inflows are strong and the country is focusing on improving its infrastructure.

"China has built up its infrastructure, while India has developed its service technology and information technology in a substantial way," he says. "Now the growth in China, in part, will come from improving its service technology."

He cites the greatest near-term danger to both economies as core inflation. For longer growth to continue, he says, China and India must increase agricultural productivity and increase the level of human capital and foreign direct investment.

Individual U.S. companies are juicing up their bottom lines by aggressively investing overseas. They are moving jobs, products and profits to places like China and India to lower costs and gain market share in domestic markets.

David Lefkowitz, senior investment strategist at UBS, New York, estimates about 33% of U.S. multinational corporate profits come from overseas.

Wages are rising in China and India. And U.S. companies are focusing on domestic demand for consumer staples. Companies with global brands such as Procter & Gamble, Colgate, Starbucks, Nike and Apple want a strong presence in these markets.

Recent fiscal third-quarter 2011 earnings call reports by corporate chief financial officers of Coca-Cola, Emerson Electric, General Electric and Estee Lauder say they are aggressively pursuing ventures in the region. Meanwhile, New York Life and MetLife have opened up shop in India and China, hoping to capitalize on the burgeoning demand for life insurance.

"Earnings from abroad have increased over the years and become more important to U.S. companies," Lefkowitz says. "It makes sense. Wages are rising in the emerging markets, and consumer demand is strong."