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Why China Destroying Shareholder Wealth on a Massive Scale & India Creating it?

Feb 9, 2024

Why China Destroying Shareholder Wealth on a Massive Scale & India Creating it

Last week, all of us woke up to the news that India's stock market is now the fourth largest in the world. It has leapfrogged Hong Kong and has only the US, China, and Japan ahead of it.

As per data compiled by Bloomberg, the combined value of shares listed on the Indian stock exchanges reached US$ 4.3 trillion as of Monday's close, versus US$ 4.29 trillion for Hong Kong.

Yes, a good part of this achievement has to do with the strong performance of the Indian stock market. However, some credit should also go to the fall in the Hong Kong stock market.

You see, Hong Kong's stock market is not in the best of health. Hang Seng, Hong Kong's benchmark index has fallen over 30% in the last one year.

In contrast, the BSE Sensex is up almost 16% during the same period. Hence, India leapfrogging Hong Kong is as much about Hong Kong's poor performance as it is about India's strong performance.

Although I haven't done a detailed analysis, I believe most of the Hong Kong benchmark index is comprised of Chinese stocks. Hence, the poor performance of the Hong Kong index is actually a reflection of the poor performance of the Chinese stock market.

And the poor performance of the Chinese stock market is a reflection of its struggling economy.

Yes, that's correct. World's second largest economy is going through some serious struggle right now. There are articles galore on the internet on how the Chinese economy is faltering and the wheels of economic growth seem to be coming off.

Just to put things in perspective, Chinese economy has grown by 5.2% in 2023, its slowest since 1976 - with the exception of Covid hit 2020.

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What is even more concerning is that the growth for Q4 versus a year ago has come in at just 1%.

Also, the nominal GDP growth in 2023 has come in at just 4.2%, a full 1% less than the real GDP growth of 5.2% (yes, in China there is deflation and not inflation).

Now, contrast this with India where GDP in the current fiscal is expected to grow at 7.2% in real terms and close to 9-10% in nominal terms. What this implies is that India seems to be growing at least twice as fast as its Asian rival.

Little wonder, Indian stocks are shining, and the Chinese ones are going through a meltdown.

In fact, even when the Chinese economy was firing all cylinders, the Chinese stock market wasn't doing spectacularly well.

Well, perhaps no one knows this better than Anthony Bolton, the legendary fund manager at Fidelity. So enamoured was Bolton with the Chinese economy that he came out of retirement and started managing a China focused fund back in 2010.

This was the time when China was the fastest growing economy in the world. Bolton famously dubbed it as 'investment opportunity of the next decade'.

However, within a span of three years, this opportunity had turned sour for Bolton. His China focused fund lost 17% in 3 years while the S&P 500 was up 30% during the same period.

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Unfortunately, he stepped down after 3 years and hence we can only speculate about what his long-term track record would have looked like.

Given how it has performed historically, Bolton would have found it hard to make good returns from the Chinese stock market.

A small Google search will reveal that the Chinese benchmark, the Shanghai Composite index, has gone up only about 4x in the last 30 years. That's a very poor CAGR of around 5%.

Contrast this with the Sensex that's up almost 21x during the same period, translating into a CAGR of an impressive 11%.

But why is this the case?

Why does an economy that has been the envy of the world for most part of the last 3 decades and is currently almost 5x bigger than India's, have such an underperforming stock market? Why hasn't China's stock market followed its GDP to become one of the best performing stock markets? Why has it lagged so much?

Well, all we need to do is ask ourselves a simple question and we will get our answer.

If forced to invest a substantial part of your savings in a foreign country, where would you rather invest, the US stock market or the Chinese stock market?

I believe most of us would prefer investing in US stocks. The reasons are not hard to find. The US has a much better track record in protecting the rights of minority shareholders and long-term wealth creation.

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Some of the world's largest companies by market cap are from the US. It's also home to some of the biggest wealth creating companies. There is more transparency in the US stock market, and it has a better track record of bringing corrupt and dishonest managements to book.

It would be safe to assume that one's hard-earned money will be better protected in the US than in China as long as one is investing sensibly and not taking undue risks.

China's track record in these matters hasn't been great. Most of the large companies there are government owned. Often, the interest of the economy or the government takes precedence over the interest of the minority shareholders.

China is also notorious for policy flip-flops, rampant speculation and withholding of information crucial to assessing business fundamentals.

Hence, there is a risk that one's capital may not be safe in China over the long term even though one is doing his research diligently.

Coming to India, I believe that India is much closer to the US than to China in matters of long-term wealth creation and protecting the rights of minority shareholders.

Indian stocks have been genuine wealth creators over the long term and its stocks have rewarded investors who've displayed patience and rationality.

Matters like information dissemination, shareholder activism and corporate governance are followed more seriously here than in China.

Hence, from a long-term perspective, India does look much better placed than China and is unlikely to face capital flight on a major scale the way China does every now and then.

Besides, the future also seems brighter in India as compared to China. While China is struggling to get its act together on the economic front and may even face years of stagnation, India seems to be in an opposite situation.

In fact, India seems to be where China was a couple of decades ago i.e. at an inflection point of rapid economic growth and rising prosperity.

It's the fastest growing major economy in the world right now and may continue to remain so well into the future. Its finances are robust, its balance sheet strong and its balance of payments situation in good shape.

Hence, barring some unforeseen catastrophe, Indian stocks may not witness the same meltdown that the Chinese stocks are going through currently.

In fact, any such meltdown should not be seen negatively. Instead, it should be seen as a golden opportunity to buy into the long-term India growth story. And should be grabbed with both hands.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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