China may be the second-largest economy in the world today, but a major part of its stunning economic growth has been contributed by the billions of dollars of investment that the western world repeatedly pumped into the Chinese stock markets.
However, the world is changing now. The way people invest their money is also changing rapidly. China is no longer the most attractive investment destination in the world. Rather India is replacing China as the world’s favourite investment destination. Investors are fleeing China with all their money and they are increasingly turning towards the Indian stock markets.
India’s stock markets are gaining at the expense of the Chinese
Over the past five years, the main Chinese and Indian share indexes have been moving in opposite directions.
Inflows into China through the stock connect scheme, which links Hong Kong with Chinese mainland stock exchanges and makes up around 70% of the foreign portfolio flows has slumped in June and July despite a bullish start at the start of the year when Chinese stocks got included in global benchmarks and pushed buying activity.
Meanwhile, China’s pain is turning out to be India’s gain. India’s benchmark share index is the biggest gainer this year amongst the largest country indexes around the world this year. Investors are readily turning towards India and the number of retail investors increased by nearly 35% in the Financial Year which in ended March to reach 55 million.
Still, India’s stock market has massive absorption capacity to accommodate all the buyers who are pulling their money out of Chinese stock markets and are looking for an alternate option. This means that India will continue to make gains out of all the money that keeps flowing out of the Chinese stock markets.
Why is China’s stock market are tumbling?
Well, there is a simple reason driving the epic decline of the Chinese stock market. Chinese President Xi Jinping is running his country like a mad dictator.
There is simply too much volatility in the Chinese stock market. Every time the Chinese President uses his regulatory authorities to crack down on entrepreneurs like Alibaba founder Jack Ma or instigates an absolute carnage against a particular sector, the investors and stock traders get rattled and escape with their money.
Volatility is always greater in dictatorships because you never know what a market-illiterate dictator like Xi Jinping at the helm of affairs would do next. This is exactly what is hurting China.
Take for instance Xi Jinping’s crackdown on the EduTech sector. The mushrooming EduTech companies had garnered investments worth 106 billion Yuan during the Coronavirus-related lockdowns. However, the EduTech enterprises ultimately fell to Xi Jinping’s anti-market and business-subverting policies wiping out billions from the bourses.
Xi’s crackdown on the EduTech sector has, in fact, reduced several billionaires into millionaires. Chen, the founder, chairman, and CEO of Gaotu Techedu found his net worth plummeting to $336 million, according to the Bloomberg Billionaires Index, after shares in his online-tutoring firm fell by nearly two-thirds in New York trading on rumours of a regulatory overhaul.
Xi has also cracked down massively on the tech sector and Chinese tech companies have registered a loss of over $800 billion.
You can imagine what happens to an average stock market trader when a market-illiterate President literally starts hunting down the biggest of businesses and wiping billions of dollars out of the stock market every now and then.
Every one of Xi Jinping’s crazy crackdowns is followed by an erosion of billions of dollars in the Chinese stock market, raising fear or insecurity in the local traders or foreign portfolio investors. This ultimately leads to a flight of money out of the Chinese stock market. We are therefore not surprised by how the Chinese stock market is tumbling uncontrollably.
To add to China’s woes, the Coronavirus Pandemic and the global economic situation haven’t helped either. Domestic economic activity has gone down and the shrinking global trade is also hurting the exports-based Chinese economy. Xi Jinping’s “dual circulation” policy to capitalise upon the big domestic market too was dead on arrival and has failed to rescue the tumbling stock market.
Why India’s stock market is the best performing one
While China’s stock market tumbles, India’s stock market is soaring to record highs on the back of growing optimism. The investor sentiment is simply too good with a pro-reforms and business-friendly government in power.
India’s Prime Minister Narendra Modi is a popular leader who appreciates and promotes stock market growth. So, unlike the case with Xi, traders know that Modi won’t make any reckless moves or impose tight regulatory measures on business establishments. Moreover, the country has recorded a whopping 20.1 per cent GDP growth in its last quarter, which has further improved the investor climate and market sentiment.
Last year, India had to impose repeated lockdowns to fight the Coronavirus pandemic. Therefore, business activity and earnings went down, and people turned to the stock market. Increased buying pushed the stock market and caused an impressive boom.
This year, India managed to keep its economic activity open despite the second wave of the Coronavirus pandemic, which led to an impressive rebound of 20.1% in GDP growth in a single quarter and this has only further improved the investor sentiment.
Meanwhile, foreign portfolio investors who are exiting the Chinese stock market needed an alternative and they have found one in India.
The global economic slowdown too seems to be immaterial at this stage. The return correlation between India and global equities has declined to 61% from over 80% a few months ago, and the Indian stock market continues to grow.
India’s stock market is unique in the sense that it doesn’t get profoundly affected by global volatility. India has always had a good culture of self-reliance in economy and simply because global trade goes down, the fundamentals of the Indian economy do not get shaken.
In fact, over the one last year, India has relied on its inherent quality of resilience and self-reliance to overcome global economic disruptions and this shows in India’s stock market performance. It is because of this resilience in the Indian economy and the Indian stock market that most of the investors exiting China are turning towards India.
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