Over the past few years, Foreign Institutional Investors (FIIs) have increasingly preferred China to India. This change in investment pattern has raised eyebrows among market analysts and investors. But why is this happening? Let’s discuss the major factors behind FIIs preferring China and how it affects India’s investment scene.
Valuation Advantage: China’s Undervalued Markets
One of the main reasons FIIs are shifting towards China is the valuation benefit that Chinese equities provide over Indian equities. Here’s why:
Relative Valuations:
Chinese equities are perceived to be undervalued, thus a better bet for investors looking for affordable opportunities. For example, China’s market capitalization was around $11.51 trillion in January 2025, which represents a wide valuation difference from India.
Market Performance:
Whereas the Indian stock market has witnessed strong growth in the last two years, the market in China, in recent times, has undergone a strong pick-up. Hang Seng Index, for instance, has recovered strongly on back of proactive fiscal policies and strong valuations. The pick-up has made the country a strong short-term investing option.
Sectoral Outperformance:
China’s tech industry, or more specifically, through vehicles such as the Hang Seng Tech ETF, has beaten India’s tech industry. This sector growth has further enriched China’s valuation premium, inviting FIIs who are seeking opportunities in high growth.
Economic Reforms and Stimulus: China’s Proactive Policies
China’s government has introduced a string of economic reforms and stimulus policies to stabilize the economy and draw in foreign investment. Highlights are as follows:
Increasing Consumption:
For the first time, increasing domestic consumption has been placed on a top agenda. The government is taking special measures to boost consumer spending, which is projected to fuel economic growth.
Industrial Upgrading:
China is emphasizing the development of emerging industries, upgrading the traditional sectors, and encouraging innovation in the digital economy. The aim is to improve productivity and competitiveness.
Science and Innovation:
The government is speeding up the construction of a high-quality education system and enhancing scientific and technological self-reliance. The efforts are aimed at stimulating long-term growth and foreign investment.
Fiscal and Monetary Policies:
China has implemented a more aggressive fiscal policy, increasing the deficit-to-GDP ratio to approximately 4% to fuel economic growth. A moderately loose monetary policy, possibly with rate cuts, is also likely to further spur the economy.
These reforms are not only stabilizing China’s economy but also making it a more desirable destination for FIIs in the short run.
Global Economic Conditions: Shifting Investor Sentiment
International market conditions are also contributing to the preference of FIIs for China. Some of the important trends are as follows:
Trade Policies and Tariffs:
Current trade tensions, especially between the U.S. and the rest of the world, have resulted in market volatility worldwide. Investors are now seeking alternative markets, and China’s business-friendly strategy has been a choice preferred by them.
Interest Rates and Monetary Policy:
The European Central Bank has reduced interest rates to make borrowing cheaper, and the possibility of a loosening of monetary policy by the U.S. Federal Reserve is affecting global market forces. Here, China’s aggressive monetary policies are considered to be a stabilizing influence.
Investor Sentiment Shifts:
There is also a general feeling of moving away from U.S. markets because of trade wars and economic signals. Investors have been moving towards European shares, Chinese tech, and the euro as alternative investments.
Sectoral Focus: Where China and India Compete
The rivalry between China and India is fierce across many industries. Here’s a brief rundown:
Technology and Electronics:
China has a stranglehold on electronics production globally, while India is working on building its tech industry through initiatives such as the Production Linked Incentive (PLI) program.
Manufacturing and Infrastructure:
China’s long history of infrastructure development provides it with an advantage, but India is using its educated labor pool to draw in manufacturing investment.
Renewable Energy:
China is ahead in the production of solar and wind power, but India has aggressive plans to grow its renewable energy sector and lower the reliance on Chinese imports.
Information Technology:
India is famous for its IT sector, but China is fast establishing its IT sector, especially in fields such as AI and data analytics.
India’s Long-Term Prospects: Still Attractive
In spite of the prevailing change in FII preferences, most experts are of the view that India is still a long-term investment destination. The nation’s sound economic fundamentals, expanding consumer base, and strong domestic market still provide opportunities for sustained growth. India has historically provided superior equity returns, which may appeal to investors seeking long-term returns.
Still, in the short run, Indian markets could be under pressure as FIIs continue to prefer China. To meet this challenge, India is diversifying its supply chains, scaling up the PLI scheme, and enhancing research and development strengths.
A Balancing Act for Investors
Though FIIs are now preferring China because of its valuation premium, economic reforms, and international market conditions, India’s long-term growth story continues to be appealing. Investors are likely to hedge their portfolios by taking advantage of short-term gains in China while monitoring India’s potential for steady growth.
With the changing global economic circumstances, China and India will continue to be critical drivers in the investment environment. Right now, the “Sell India, Buy China” mantra might be the prevailing message, but the robust fundamentals in India indicate that it will continue to be a significant player in the global scene in the future.